UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20182019
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______ to _______
Commission File Number: 001-36708
Uniti Group Inc.
(Exact name of registrant as specified in its charter)
Maryland | 46-5230630 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer |
10802 Executive Center Drive Benton Building Suite 300 Little Rock, Arkansas | 72211 |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (501) 850-0820
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock | UNIT | The NASDAQ Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
| ☒ |
| Accelerated filer |
| ☐ | |
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| ||||
Non-accelerated filer |
| ☐ |
| Smaller reporting company |
| ☐ | |
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| Emerging growth company |
| ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 25, 2018,November 1, 2019, the registrant had 178,981,185193,275,587 shares of common stock, $0.0001 par value per share, outstanding.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements as defined under U.S. federal securities law. Forward-looking statements include all statements that are not historical statements of fact and those regarding our intent, belief or expectations, including, but not limited to, statements regarding: our expectations regarding the effect of Windstream Holdings, Inc.’s (“Windstream Holdings” and together with its subsidiaries, “Windstream”) bankruptcy and Windstream’s performance under its long-term exclusive triple-net lease with us (the “Master Lease”); our expectations with respect to the treatment of the Master Lease in Windstream’s petitions for relief under Chapter 11 of the Bankruptcy Code, including with respect to Windstream’s claims that the Master Lease should be recharacterized as a financing transaction, that the Master Lease is a lease of personal property and that rent payments and tenant capital improvements made by Windstream under the Master Lease constituted constructive fraudulent transfers; our expectations regarding the effect of substantial doubt about our ability to continue as a going concern; our expectations regarding the future growth and demand of the telecommunication industry;telecommunications industry, future financing plans, business strategies, growth prospects, and operating and financial performance;performance, and our future liquidity needs and access to capital; expectations regarding settling conversionthe impact and integration of Information Transport Solutions, Inc. (“ITS”) and M2 Connections, including expectations regarding operational synergies with Uniti Towers and Uniti Fiber; expectations regarding the probability of our 3% convertible preferred stock in cashobligation to pay contingent consideration upon conversion;Tower Cloud, Inc.'s (“Tower Cloud”) achievement of certain defined operational and financial milestones; expectations regarding future deployment of fiber strand miles and small cell networks and recognition of revenue related thereto; expectations regarding levels of capital expenditures; expectations regarding the deductibility of goodwill for tax purposes; expectations regarding the reclassification of accumulated other comprehensive income (loss) related to derivatives to interest expense; expectations regarding the amortization of intangible assets; expectations regarding the Information Transport Solutions, Inc. (“ITS”), U.S. TelePacific Holdings Corp (“TPx”)impact of the operating company-property company partnership with Macquarie Infrastructure Partners and CableSouth Media,related acquisition of Bluebird Network, LLC (“CableSouth”Bluebird”) transactions;; our expectations regarding the wind down of the Consumer CLEC business; and expectations regarding the payment of dividends.
Words such as "anticipate(s)“anticipate(s)," "expect(s)” “expect(s)," "intend(s)” “intend(s)," "plan(s)” “plan(s)," "believe(s)” “believe(s)," "may," "will," "would," "could," "should," "seek(s)"” “may,” “will,” “would,” “could,” “should,” “seek(s)” and similar expressions, or the negative of these terms, are intended to identify such forward-looking statements. These statements are based on management's current expectations and beliefs and are subject to a number of risks and uncertainties that could lead to actual results differing materially from those projected, forecasted or expected. Although we believe that the assumptions underlying the forward-looking statements are reasonable, we can give no assurance that our expectations will be attained. Factors which could have a material adverse effect on our operations and future prospects or which could cause actual results to differ materially from our expectations include, but are not limited to:
the ability and willingness of our customers to meet and/or perform their obligations under any contractual arrangements entered into with us, including master lease arrangements;
• | the future prospects of our largest customer, Windstream Holdings, which, following a finding that it is in default of certain of its debt, on February 25, 2019, and along with all of its subsidiaries, filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code; |
the ability of our customers to comply with laws, rules and regulations in the operation of the assets we lease to them;
• | our ability to continue as a going concern if Windstream Holdings were to succeed in its recharacterization and fraudulent transfer claims against us, reject the Master Lease or be unable or unwilling to perform its obligations under the Master Lease; |
the ability and willingness of our customers to renew their leases with us upon their expiration, and the ability to reposition our properties on the same or better terms in the event of nonrenewal or in the event we replace an existing tenant;
• | the ability and willingness of our customers to meet and/or perform their obligations under any contractual arrangements entered into with us, including master lease arrangements; |
our ability to renew, extend or retain our contracts or to obtain new contracts with significant customers (including customers of the businesses that we acquire);
• | the ability of our customers to comply with laws, rules and regulations in the operation of the assets we lease to them; |
the availability of and our ability to identify suitable acquisition opportunities and our ability to acquire and lease the respective properties on favorable terms or operate and integrate the acquired businesses;
• | the ability and willingness of our customers to renew their leases with us upon their expiration, and the ability to reposition our properties on the same or better terms in the event of nonrenewal or in the event we replace an existing tenant; |
our ability to generate sufficient cash flows to service our outstanding indebtedness;
• | our ability to renew, extend or retain our contracts or to obtain new contracts with significant customers (including customers of the businesses that we acquire); |
our ability to access debt and equity capital markets;
• | the availability of and our ability to identify suitable acquisition opportunities and our ability to acquire and lease the respective properties on favorable terms or operate and integrate the acquired businesses; |
the impact on our business or the business of our customers as a result of credit rating downgrades, and fluctuating interest rates;
• | our ability to generate sufficient cash flows to service our outstanding indebtedness; |
adverse impacts of litigation or disputes involving us or our customers;
• | our ability to access debt and equity capital markets; |
our ability to retain our key management personnel;
our ability to maintain our status as a real estate investment trust (“REIT”);
changes in the U.S. tax law and other federal, state or local laws, whether or not specific to REITs, including the impact of the recently enacted U.S. tax reform legislation;
covenants in our debt agreements that may limit our operational flexibility;
the possibility that we may experience equipment failures, natural disasters, cyber attacks or terrorist attacks for which our insurance may not provide adequate coverage;
the risk that we fail to fully realize the potential benefits of or have difficulty in integrating the companies we acquire;
other risks inherent in the communications industry and in the ownership of communications distribution systems, including potential liability relating to environmental matters and illiquidity of real estate investments;
• | adverse impacts of changes to our business, economic trends or key assumptions regarding our estimates of fair value, including potential impacts of recent developments surrounding Windstream that could result in an impairment charge in the future, which could have a significant impact to our reported earnings; |
2
| • | the impact on our business or the business of our customers as a result of credit rating downgrades, and fluctuating interest rates; |
• | adverse impacts of litigation or disputes involving us or our customers; |
• | our ability to retain our key management personnel; |
• | our ability to maintain our status as a real estate investment trust (“REIT”), including as a result of the effects of the recent events with respect to our largest customer, Windstream Holdings; |
• | changes in the U.S. tax law and other federal, state or local laws, whether or not specific to REITs, including the impact of the 2017 U.S. tax reform legislation; |
• | covenants in our debt agreements that may limit our operational flexibility; |
• | the possibility that we may experience equipment failures, natural disasters, cyber attacks or terrorist attacks for which our insurance may not provide adequate coverage; |
• | the risk that we fail to fully realize the potential benefits of or have difficulty in integrating the companies we acquire; |
• | other risks inherent in the communications industry and in the ownership of communications distribution systems, including potential liability relating to environmental matters and illiquidity of real estate investments; and |
• | additional factors discussed in Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form 10-Q and in Part I, Item 1A "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, |
Forward-looking statements speak only as of the date of this Quarterly Report. Except in the normal course of our public disclosure obligations, we expressly disclaim any obligation to release publicly any updates or revisions to any forward-looking statements to reflect any change in our expectations or any change in events, conditions or circumstances on which any such statement is based.
3
Table of Contents
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| Page |
PART I. |
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Item 1. | 5 | |
| Uniti Group Inc. |
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| 5 | |
| 6 | |
| Condensed Consolidated Statements of Comprehensive Income (Loss) | 7 |
| 8 | |
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| |
| 12 | |
| ||
2.Basis of Presentation and Summary of Significant Accounting Policies | 12 | |
3.Revenues | 17 | |
4.Leases | 19 | |
5.Business Combinations, Asset Acquisitions and Dispositions | 23 | |
24 | ||
27 | ||
27 | ||
29 | ||
30 | ||
33 | ||
35 | ||
38 | ||
39 | ||
40 | ||
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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PART II. |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 3. |
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Item 4. |
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Item 5. |
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Item 6. |
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4
PART I—FINANCIALFINANCIAL INFORMATION
Uniti Group Inc.
Condensed Consolidated Balance Sheets
(unaudited)
(Thousands, except par value) |
| September 30, 2018 |
|
| December 31, 2017 |
|
| (Unaudited) September 30, 2019 |
|
| December 31, 2018 |
| ||||
Assets: |
|
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|
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Property, plant and equipment, net |
| $ | 3,155,206 |
|
| $ | 3,053,889 |
|
| $ | 3,371,151 |
|
| $ | 3,209,006 |
|
Cash and cash equivalents |
|
| 118,493 |
|
|
| 59,765 |
|
|
| 197,317 |
|
|
| 38,026 |
|
Accounts receivable, net |
|
| 58,661 |
|
|
| 43,652 |
|
|
| 86,939 |
|
|
| 104,063 |
|
Goodwill |
|
| 681,175 |
|
|
| 673,729 |
|
|
| 690,672 |
|
|
| 692,385 |
|
Intangible assets, net |
|
| 411,449 |
|
|
| 429,357 |
|
|
| 536,654 |
|
|
| 432,821 |
|
Straight-line revenue receivable |
|
| 58,212 |
|
|
| 47,041 |
|
|
| 612 |
|
|
| 61,785 |
|
Derivative asset |
|
| 64,410 |
|
|
| 6,793 |
|
|
| - |
|
|
| 31,043 |
|
Other assets |
|
| 23,218 |
|
|
| 15,856 |
| ||||||||
Other assets, net |
|
| 147,880 |
|
|
| 23,808 |
| ||||||||
Total Assets |
| $ | 4,570,824 |
|
| $ | 4,330,082 |
|
| $ | 5,031,225 |
|
| $ | 4,592,937 |
|
Liabilities, Convertible Preferred Stock and Shareholders' Deficit: |
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Liabilities: |
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Accounts payable, accrued expenses and other liabilities |
| $ | 81,556 |
|
| $ | 77,634 |
| ||||||||
Accounts payable, accrued expenses and other liabilities, net |
| $ | 208,477 |
|
| $ | 94,179 |
| ||||||||
Accrued interest payable |
|
| 70,613 |
|
|
| 28,684 |
|
|
| 73,638 |
|
|
| 28,097 |
|
Deferred revenue |
|
| 682,481 |
|
|
| 537,553 |
|
|
| 1,040,288 |
|
|
| 726,262 |
|
Derivative liability |
|
| 27,761 |
|
|
| - |
| ||||||||
Dividends payable |
|
| 112,277 |
|
|
| 109,557 |
|
|
| 9,830 |
|
|
| 113,744 |
|
Deferred income taxes |
|
| 54,539 |
|
|
| 55,478 |
|
|
| 31,118 |
|
|
| 52,434 |
|
Capital lease obligations |
|
| 57,104 |
|
|
| 56,329 |
| ||||||||
Finance lease obligations |
|
| 55,225 |
|
|
| 55,282 |
| ||||||||
Contingent consideration |
|
| 86,435 |
|
|
| 105,762 |
|
|
| 11,440 |
|
|
| 83,401 |
|
Notes and other debt, net |
|
| 4,745,227 |
|
|
| 4,482,697 |
|
|
| 5,010,287 |
|
|
| 4,846,233 |
|
Total liabilities |
|
| 5,890,232 |
|
|
| 5,453,694 |
|
|
| 6,468,064 |
|
|
| 5,999,632 |
|
|
|
|
|
|
|
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|
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Commitments and contingencies (Note 12) |
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Commitments and contingencies (Note 13) |
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Convertible preferred stock, Series A, $0.0001 par value, 88 shares authorized, issued and outstanding, $87,500 liquidation value |
|
| 85,763 |
|
|
| 83,530 |
| ||||||||
Convertible preferred stock, Series A, $0.0001 par value, 88 shares authorized, issued and outstanding: 0 shares at September 30, 2019 and 88 shares at December 31, 2018, $87,500 liquidation value |
|
| - |
|
|
| 86,508 |
| ||||||||
|
|
|
|
|
|
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Shareholders' Deficit: |
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|
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Preferred stock, $0.0001 par value, 50,000 shares authorized, no shares issued and outstanding |
|
| - |
|
|
| - |
| ||||||||
Common stock, $0.0001 par value, 500,000 shares authorized, issued and outstanding: 178,210 shares at September 30, 2018 and 174,852 at December 31, 2017 |
|
| 18 |
|
|
| 17 |
| ||||||||
Preferred stock, $0.0001 par value, 50,000 shares authorized, 0 shares issued and outstanding |
|
| - |
|
| �� | - |
| ||||||||
Common stock, $0.0001 par value, 500,000 shares authorized, issued and outstanding: 192,138 shares at September 30, 2019 and 180,536 at December 31, 2018 |
|
| 19 |
|
|
| 18 |
| ||||||||
Additional paid-in capital |
|
| 711,271 |
|
|
| 644,328 |
|
|
| 948,382 |
|
|
| 757,517 |
|
Accumulated other comprehensive income |
|
| 66,291 |
|
|
| 7,821 |
| ||||||||
Accumulated other comprehensive (loss) income |
|
| (27,452 | ) |
|
| 30,105 |
| ||||||||
Distributions in excess of accumulated earnings |
|
| (2,278,124 | ) |
|
| (1,960,715 | ) |
|
| (2,442,378 | ) |
|
| (2,373,218 | ) |
Total Uniti shareholders' deficit |
|
| (1,500,544 | ) |
|
| (1,308,549 | ) |
|
| (1,521,429 | ) |
|
| (1,585,578 | ) |
Noncontrolling interests - operating partnership units |
|
| 95,373 |
|
|
| 101,407 |
|
|
| 84,590 |
|
|
| 92,375 |
|
Total shareholders' deficit |
|
| (1,405,171 | ) |
|
| (1,207,142 | ) |
|
| (1,436,839 | ) |
|
| (1,493,203 | ) |
Total Liabilities, Convertible Preferred Stock, and Shareholders' Deficit |
| $ | 4,570,824 |
|
| $ | 4,330,082 |
|
| $ | 5,031,225 |
|
| $ | 4,592,937 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Condensed Consolidated Statements of Income
(unaudited)
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| Three Months Ended September 30, |
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| Nine Months Ended September 30, |
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||||
(Thousands, except per share data) |
| 2018 |
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| 2017 |
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| 2018 |
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| 2017 |
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| 2019 |
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| 2018 |
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| 2019 |
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| 2018 |
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Revenues: |
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|
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Leasing |
| $ | 174,822 |
|
| $ | 171,673 |
|
| $ | 521,481 |
|
| $ | 512,893 |
|
| $ | 179,648 |
|
| $ | 174,822 |
|
| $ | 532,773 |
|
| $ | 521,481 |
|
Fiber Infrastructure |
|
| 70,130 |
|
|
| 66,363 |
|
|
| 204,486 |
|
|
| 136,158 |
|
|
| 77,979 |
|
|
| 70,130 |
|
|
| 236,139 |
|
|
| 204,486 |
|
Tower |
|
| 4,319 |
|
|
| 2,796 |
|
|
| 10,161 |
|
|
| 6,679 |
|
|
| 3,273 |
|
|
| 4,319 |
|
|
| 11,499 |
|
|
| 10,161 |
|
Consumer CLEC |
|
| 3,365 |
|
|
| 4,378 |
|
|
| 10,752 |
|
|
| 13,966 |
|
|
| 2,729 |
|
|
| 3,365 |
|
|
| 8,663 |
|
|
| 10,752 |
|
Total revenues |
|
| 252,636 |
|
|
| 245,210 |
|
|
| 746,880 |
|
|
| 669,696 |
|
|
| 263,629 |
|
|
| 252,636 |
|
|
| 789,074 |
|
|
| 746,880 |
|
Costs and Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
| 80,406 |
|
|
| 78,784 |
|
|
| 237,398 |
|
|
| 227,235 |
|
|
| 104,655 |
|
|
| 80,406 |
|
|
| 286,842 |
|
|
| 237,398 |
|
Depreciation and amortization |
|
| 112,748 |
|
|
| 113,444 |
|
|
| 342,311 |
|
|
| 317,404 |
|
|
| 101,166 |
|
|
| 112,748 |
|
|
| 307,571 |
|
|
| 342,311 |
|
General and administrative expense |
|
| 20,666 |
|
|
| 22,068 |
|
|
| 63,867 |
|
|
| 49,549 |
|
|
| 25,267 |
|
|
| 20,666 |
|
|
| 75,921 |
|
|
| 63,867 |
|
Operating expense (exclusive of depreciation and amortization) |
|
| 34,773 |
|
|
| 30,172 |
|
|
| 96,199 |
|
|
| 74,258 |
|
|
| 39,948 |
|
|
| 34,773 |
|
|
| 118,529 |
|
|
| 96,199 |
|
Transaction related costs |
|
| 2,323 |
|
|
| 8,512 |
|
|
| 12,025 |
|
|
| 32,213 |
| ||||||||||||||||
Transaction related and other costs |
|
| 15,179 |
|
|
| 2,323 |
|
|
| 28,883 |
|
|
| 12,025 |
| ||||||||||||||||
Gain on sale of real estate (Note 5) |
|
| (205 | ) |
|
| - |
|
|
| (28,995 | ) |
|
| - |
| ||||||||||||||||
Other (income) expense |
|
| (1,038 | ) |
|
| (3,933 | ) |
|
| (1,574 | ) |
|
| 9,638 |
|
|
| (859 | ) |
|
| (1,038 | ) |
|
| (32,091 | ) |
|
| (1,574 | ) |
Total costs and expenses |
|
| 249,878 |
|
|
| 249,047 |
|
|
| 750,226 |
|
|
| 710,297 |
|
|
| 285,151 |
|
|
| 249,878 |
|
|
| 756,660 |
|
|
| 750,226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
| 2,758 |
|
|
| (3,837 | ) |
|
| (3,346 | ) |
|
| (40,601 | ) | ||||||||||||||||
Income tax benefit |
|
| (1,466 | ) |
|
| (8,672 | ) |
|
| (5,208 | ) |
|
| (8,976 | ) | ||||||||||||||||
Net income (loss) |
|
| 4,224 |
|
|
| 4,835 |
|
|
| 1,862 |
|
|
| (31,625 | ) | ||||||||||||||||
Net income attributable to noncontrolling interests |
|
| 93 |
|
|
| 107 |
|
|
| 24 |
|
|
| 107 |
| ||||||||||||||||
Net income (loss) attributable to shareholders |
|
| 4,131 |
|
|
| 4,728 |
|
|
| 1,838 |
|
|
| (31,732 | ) | ||||||||||||||||
(Loss) income before income taxes |
|
| (21,522 | ) |
|
| 2,758 |
|
|
| 32,414 |
|
|
| (3,346 | ) | ||||||||||||||||
Income tax (benefit) expense |
|
| (1,745 | ) |
|
| (1,466 | ) |
|
| 10,152 |
|
|
| (5,208 | ) | ||||||||||||||||
Net (loss) income |
|
| (19,777 | ) |
|
| 4,224 |
|
|
| 22,262 |
|
|
| 1,862 |
| ||||||||||||||||
Net (loss) income attributable to noncontrolling interests |
|
| (357 | ) |
|
| 93 |
|
|
| 523 |
|
|
| 24 |
| ||||||||||||||||
Net (loss) income attributable to shareholders |
|
| (19,420 | ) |
|
| 4,131 |
|
|
| 21,739 |
|
|
| 1,838 |
| ||||||||||||||||
Participating securities' share in earnings |
|
| (655 | ) |
|
| (388 | ) |
|
| (1,992 | ) |
|
| (1,156 | ) |
|
| (50 | ) |
|
| (655 | ) |
|
| (301 | ) |
|
| (1,992 | ) |
Dividends declared on convertible preferred stock |
|
| (656 | ) |
|
| (656 | ) |
|
| (1,968 | ) |
|
| (1,968 | ) |
|
| - |
|
|
| (656 | ) |
|
| (656 | ) |
|
| (1,968 | ) |
Amortization of discount on convertible preferred stock |
|
| (745 | ) |
|
| (745 | ) |
|
| (2,235 | ) |
|
| (2,235 | ) |
|
| - |
|
|
| (745 | ) |
|
| (993 | ) |
|
| (2,235 | ) |
Net income (loss) attributable to common shareholders |
| $ | 2,075 |
|
| $ | 2,939 |
|
| $ | (4,357 | ) |
| $ | (37,091 | ) | ||||||||||||||||
Net (loss) income attributable to common shareholders |
| $ | (19,470 | ) |
| $ | 2,075 |
|
| $ | 19,789 |
|
| $ | (4,357 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.01 |
|
| $ | 0.02 |
|
| $ | (0.02 | ) |
| $ | (0.22 | ) |
| $ | (0.10 | ) |
| $ | 0.01 |
|
| $ | 0.11 |
|
| $ | (0.02 | ) |
Diluted |
| $ | 0.01 |
|
| $ | (0.02 | ) |
| $ | (0.02 | ) |
| $ | (0.26 | ) |
| $ | (0.10 | ) |
| $ | 0.01 |
|
| $ | 0.11 |
|
| $ | (0.02 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 175,396 |
|
|
| 174,818 |
|
|
| 175,101 |
|
|
| 166,624 |
|
|
| 191,940 |
|
|
| 175,396 |
|
|
| 185,746 |
|
|
| 175,101 |
|
Diluted |
|
| 175,653 |
|
|
| 175,399 |
|
|
| 175,101 |
|
|
| 166,816 |
|
|
| 191,940 |
|
|
| 175,653 |
|
|
| 185,746 |
|
|
| 175,101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Dividends declared per common share |
| $ | 0.60 |
|
| $ | 0.60 |
|
| $ | 1.80 |
|
| $ | 1.80 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
Condensed Consolidated Statements of Comprehensive Income (Loss)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(Thousands) |
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| ||||
Net income (loss) |
| $ | 4,224 |
|
| $ | 4,835 |
|
| $ | 1,862 |
|
| $ | (31,625 | ) |
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on derivative contracts |
|
| 7,744 |
|
|
| 1,789 |
|
|
| 57,617 |
|
|
| (4,340 | ) |
Changes in foreign currency translation |
|
| 2,547 |
|
|
| 76 |
|
|
| 2,233 |
|
|
| 5,074 |
|
Other comprehensive income: |
|
| 10,291 |
|
|
| 1,865 |
|
|
| 59,850 |
|
|
| 734 |
|
Comprehensive income (loss) |
|
| 14,515 |
|
|
| 6,700 |
|
|
| 61,712 |
|
|
| (30,891 | ) |
Comprehensive income attributable to noncontrolling interest |
|
| 330 |
|
|
| 150 |
|
|
| 1,404 |
|
|
| 150 |
|
Comprehensive income (loss) attributable to common shareholders |
| $ | 14,185 |
|
| $ | 6,550 |
|
| $ | 60,308 |
|
| $ | (31,041 | ) |
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(Thousands) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Net (loss) income |
| $ | (19,777 | ) |
| $ | 4,224 |
|
| $ | 22,262 |
|
| $ | 1,862 |
|
Other comprehensive (loss) income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (loss) gain on derivative contracts |
|
| (8,646 | ) |
|
| 7,744 |
|
|
| (58,695 | ) |
|
| 57,617 |
|
Changes in foreign currency translation |
|
| - |
|
|
| 2,547 |
|
|
| (63 | ) |
|
| 2,233 |
|
Other comprehensive (loss) income: |
|
| (8,646 | ) |
|
| 10,291 |
|
|
| (58,758 | ) |
|
| 59,850 |
|
Comprehensive (loss) income |
|
| (28,423 | ) |
|
| 14,515 |
|
|
| (36,496 | ) |
|
| 61,712 |
|
Comprehensive (loss) income attributable to noncontrolling interest |
|
| (511 | ) |
|
| 330 |
|
|
| (678 | ) |
|
| 1,404 |
|
Comprehensive (loss) income attributable to common shareholders |
| $ | (27,912 | ) |
| $ | 14,185 |
|
| $ | (35,818 | ) |
| $ | 60,308 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
Uniti Group Inc.
Condensed Consolidated Statements of Shareholders’ Deficit
(unaudited)
|
| For the three months ended September 30, |
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Thousands, except share data) |
| Preferred Stock |
|
| Common Stock |
|
| Additional Paid-in Capital |
|
| Accumulated Other Comprehensive Income (Loss) |
|
| Distributions in Excess of Accumulated Earnings |
|
| Noncontrolling Interest |
|
| Total Shareholders' Deficit |
|
| Preferred Stock |
|
| Common Stock |
|
| Additional Paid-in Capital |
|
| Accumulated Other Comprehensive Income |
|
| Distributions in Excess of Accumulated Earnings |
|
| Noncontrolling Interest |
|
| Total Shareholders' Deficit |
| ||||||||||||||||||||||||||||||
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Balance at December 31, 2016 |
|
| - |
|
| $ | - |
|
|
| 155,138,637 |
|
| $ | 15 |
|
| $ | 141,092 |
|
| $ | (6,369 | ) |
| $ | (1,537,183 | ) |
| $ | - |
|
| $ | (1,402,445 | ) | ||||||||||||||||||||||||||||||||||||
Net loss |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (31,732 | ) |
|
| 107 |
|
|
| (31,625 | ) | ||||||||||||||||||||||||||||||||||||
Issuance of common stock |
|
| - |
|
|
| - | �� |
|
| 19,528,302 |
|
|
| 2 |
|
|
| 517,499 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 517,501 |
| ||||||||||||||||||||||||||||||||||||
Balance at June 30, 2018 |
|
| - |
|
| $ | - |
|
|
| 175,028,835 |
|
| $ | 17 |
|
| $ | 645,627 |
|
| $ | 56,237 |
|
| $ | (2,174,216 | ) |
| $ | 97,523 |
|
| $ | (1,374,812 | ) | ||||||||||||||||||||||||||||||||||||
Net income |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 4,131 |
|
|
| 93 |
|
|
| 4,224 |
| ||||||||||||||||||||||||||||||||||||
At-the-market issuance of common stock, net of offering costs |
|
| - |
|
|
| - |
|
|
| 3,180,548 |
|
|
| 1 |
|
|
| 64,422 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 64,423 |
| ||||||||||||||||||||||||||||||||||||
Amortization of discount of convertible preferred stock |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (2,235 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (2,235 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (745 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (745 | ) |
Other comprehensive income |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 691 |
|
|
| - |
|
|
| 43 |
|
|
| 734 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 10,054 |
|
|
| - |
|
|
| 237 |
|
|
| 10,291 |
|
Common stock dividends |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (304,384 | ) |
|
| - |
|
|
| (304,384 | ) | ||||||||||||||||||||||||||||||||||||
Convertible preferred stock dividends |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (1,969 | ) |
|
| - |
|
|
| (1,969 | ) | ||||||||||||||||||||||||||||||||||||
Equity issuance cost |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (18,575 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (18,575 | ) | ||||||||||||||||||||||||||||||||||||
Contributions from noncontrolling interest holders |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 105,969 |
|
|
| 105,969 |
| ||||||||||||||||||||||||||||||||||||
Distributions to noncontrolling interest |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (2,497 | ) |
|
| (2,497 | ) | ||||||||||||||||||||||||||||||||||||
Net share settlement |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (421 | ) |
|
| - |
|
|
| (1,331 | ) |
|
| - |
|
|
| (1,752 | ) | ||||||||||||||||||||||||||||||||||||
Stock-based compensation |
|
| - |
|
|
| - |
|
|
| 154,100 |
|
|
| - |
|
|
| 5,621 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 5,621 |
| ||||||||||||||||||||||||||||||||||||
Balance at September 30, 2017 |
|
| - |
|
| $ | - |
|
|
| 174,821,039 |
|
| $ | 17 |
|
| $ | 642,981 |
|
| $ | (5,678 | ) |
| $ | (1,876,599 | ) |
| $ | 103,622 |
|
| $ | (1,135,657 | ) | ||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Balance at December 31, 2017 |
|
| - |
|
| $ | - |
|
|
| 174,851,514 |
|
| $ | 17 |
|
| $ | 644,328 |
|
| $ | 7,821 |
|
| $ | (1,960,715 | ) |
| $ | 101,407 |
|
| $ | (1,207,142 | ) | ||||||||||||||||||||||||||||||||||||
Net income |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1,838 |
|
|
| 24 |
|
|
| 1,862 |
| ||||||||||||||||||||||||||||||||||||
At-the-market issuance of common stock, net of offering costs |
|
| - |
|
|
| - |
|
|
| 3,180,548 |
|
|
| 1 |
|
|
| 64,422 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 64,423 |
| ||||||||||||||||||||||||||||||||||||
Amortization of discount on convertible preferred stock |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (2,235 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (2,235 | ) | ||||||||||||||||||||||||||||||||||||
Other comprehensive income |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 58,470 |
|
|
| - |
|
|
| 1,380 |
|
|
| 59,850 |
| ||||||||||||||||||||||||||||||||||||
Common stock dividends |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (318,865 | ) |
|
| - |
|
|
| (318,865 | ) | ||||||||||||||||||||||||||||||||||||
Common stock dividends declared |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (107,379 | ) |
|
| - |
|
|
| (107,379 | ) | ||||||||||||||||||||||||||||||||||||
Distributions to noncontrolling interest |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (7,438 | ) |
|
| (7,438 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (2,480 | ) |
|
| (2,480 | ) |
Convertible preferred stock dividends |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (1,968 | ) |
|
| - |
|
|
| (1,968 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (656 | ) |
|
| - |
|
|
| (656 | ) |
Net share settlement |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (1,302 | ) |
|
| - |
|
|
| (273 | ) |
|
| - |
|
|
| (1,575 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 4 |
|
|
| - |
|
|
| (4 | ) |
|
| - |
|
|
| - |
|
Stock-based compensation |
|
| - |
|
|
| - |
|
|
| 178,135 |
|
|
| - |
|
|
| 6,058 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 6,058 |
|
|
| - |
|
|
| - |
|
|
| 814 |
|
|
| - |
|
|
| 1,963 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1,963 |
|
Impact of change in accounting standard |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1,859 |
|
|
| - |
|
|
| 1,859 |
| ||||||||||||||||||||||||||||||||||||
Balance at September 30, 2018 |
|
| - |
|
| $ | - |
|
|
| 178,210,197 |
|
| $ | 18 |
|
| $ | 711,271 |
|
| $ | 66,291 |
|
| $ | (2,278,124 | ) |
| $ | 95,373 |
|
| $ | (1,405,171 | ) |
|
| - |
|
|
| - |
|
|
| 178,210,197 |
|
|
| 18 |
|
|
| 711,271 |
|
|
| 66,291 |
|
|
| (2,278,124 | ) |
|
| 95,373 |
|
|
| (1,405,171 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Balance at June 30, 2019 |
|
| - |
|
| $ | - |
|
|
| 183,122,757 |
|
| $ | 18 |
|
| $ | 855,425 |
|
| $ | (18,960 | ) |
| $ | (2,413,326 | ) |
| $ | 87,554 |
|
| $ | (1,489,289 | ) | ||||||||||||||||||||||||||||||||||||
Impact of change in accounting standard, net of tax |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
| ||||||||||||||||||||||||||||||||||||
Net loss |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (19,420 | ) |
|
| (357 | ) |
|
| (19,777 | ) | ||||||||||||||||||||||||||||||||||||
Other comprehensive loss |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (8,492 | ) |
|
| - |
|
|
| (154 | ) |
|
| (8,646 | ) | ||||||||||||||||||||||||||||||||||||
Common stock dividends declared ($0.05 per share) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (9,632 | ) |
|
| - |
|
|
| (9,632 | ) | ||||||||||||||||||||||||||||||||||||
Distributions to noncontrolling interest |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (173 | ) |
|
| (173 | ) | ||||||||||||||||||||||||||||||||||||
Exchange of noncontrolling interest |
|
| - |
|
|
| - |
|
|
| 275,788 |
|
|
| - |
|
|
| 2,280 |
|
|
| - |
|
|
| - |
|
|
| (2,280 | ) |
|
| - |
| ||||||||||||||||||||||||||||||||||||
Equity settlement convertible preferred stock |
|
| - |
|
|
| - |
|
|
| 8,677,163 |
|
|
| 1 |
|
|
| 87,499 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 87,500 |
| ||||||||||||||||||||||||||||||||||||
Net share settlement |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (67 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (67 | ) | ||||||||||||||||||||||||||||||||||||
Stock-based compensation |
|
| - |
|
|
| - |
|
|
| 12,871 |
|
|
| - |
|
|
| 2,845 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 2,845 |
| ||||||||||||||||||||||||||||||||||||
Issuance of common stock - employee stock purchase plan |
|
| - |
|
|
| - |
|
|
| 49,487 |
|
|
| - |
|
|
| 400 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 400 |
| ||||||||||||||||||||||||||||||||||||
Balance at September 30, 2019 |
|
| - |
|
| $ | - |
|
|
| 192,138,066 |
|
| $ | 19 |
|
| $ | 948,382 |
|
| $ | (27,452 | ) |
| $ | (2,442,378 | ) |
| $ | 84,590 |
|
| $ | (1,436,839 | ) |
8
The accompanying notes are an integral part of these condensed consolidated financial statements.
Uniti Group Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
|
| Nine Months Ended September 30, |
| |||||
(Thousands) |
| 2018 |
|
| 2017 |
| ||
Cash flow from operating activities |
|
|
|
|
|
|
|
|
Net income (loss) |
| $ | 1,862 |
|
| $ | (31,625 | ) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 342,311 |
|
|
| 317,404 |
|
Amortization of deferred financing costs and debt discount |
|
| 18,340 |
|
|
| 17,091 |
|
Deferred income taxes |
|
| (6,081 | ) |
|
| (12,281 | ) |
Straight-line revenues |
|
| (10,932 | ) |
|
| (10,857 | ) |
Stock-based compensation |
|
| 6,058 |
|
|
| 5,621 |
|
Change in fair value of contingent consideration |
|
| (687 | ) |
|
| 9,091 |
|
Other |
|
| 2,721 |
|
|
| 810 |
|
Changes in assets and liabilities, net of acquisitions: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
| (14,848 | ) |
|
| 532 |
|
Other assets |
|
| (4,899 | ) |
|
| (4,307 | ) |
Accounts payable, accrued expenses and other liabilities |
|
| 66,090 |
|
|
| 46,275 |
|
Net cash provided by operating activities |
|
| 399,935 |
|
|
| 337,754 |
|
Cash flow from investing activities |
|
|
|
|
|
|
|
|
Acquisition of businesses, net of cash acquired |
|
| - |
|
|
| (763,665 | ) |
Acquisition of ground lease investments |
|
| - |
|
|
| (13,869 | ) |
NMS asset acquisitions (Note 4) |
|
| (3,299 | ) |
|
| (68,557 | ) |
Other capital expenditures |
|
| (297,108 | ) |
|
| (111,101 | ) |
Net cash used in investing activities |
|
| (300,407 | ) |
|
| (957,192 | ) |
Cash flow from financing activities |
|
|
|
|
|
|
|
|
Principal payments on debt |
|
| (15,810 | ) |
|
| (15,810 | ) |
Dividends paid |
|
| (318,116 | ) |
|
| (294,272 | ) |
Payments of contingent consideration |
|
| (18,640 | ) |
|
| (19,999 | ) |
Proceeds from issuance of Notes |
|
| - |
|
|
| 201,000 |
|
Distributions paid to noncontrolling interest |
|
| (7,438 | ) |
|
| - |
|
Borrowings under revolving credit facility |
|
| 350,000 |
|
|
| 360,000 |
|
Payments under revolving credit facility |
|
| (90,000 | ) |
|
| (200,000 | ) |
Capital lease payments |
|
| (3,819 | ) |
|
| (2,348 | ) |
Deferred financing costs |
|
| - |
|
|
| (28,533 | ) |
Common stock issuance, net of costs |
|
| 64,423 |
|
|
| 498,924 |
|
Net share settlement |
|
| (1,575 | ) |
|
| (1,752 | ) |
Net cash (used in) provided by financing activities |
|
| (40,975 | ) |
|
| 497,210 |
|
Effect of exchange rates on cash and cash equivalents |
|
| 175 |
|
|
| 397 |
|
Net increase (decrease) in cash and cash equivalents |
|
| 58,728 |
|
|
| (121,831 | ) |
Cash and cash equivalents at beginning of period |
|
| 59,765 |
|
|
| 171,754 |
|
Cash and cash equivalents at end of period |
| $ | 118,493 |
|
| $ | 49,923 |
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
Property and equipment acquired but not yet paid |
| $ | 11,446 |
|
| $ | 3,602 |
|
Tenant capital improvements |
|
| 124,036 |
|
|
| 166,298 |
|
Acquisition of businesses through non-cash consideration |
| $ | - |
|
| $ | 122,395 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
8
|
| For the nine months ended September 30, |
| |||||||||||||||||||||||||||||||||
(Thousands, except share data) |
| Preferred Stock |
|
| Common Stock |
|
| Additional Paid-in Capital |
|
| Accumulated Other Comprehensive Income |
|
| Distributions in Excess of Accumulated Earnings |
|
| Noncontrolling Interest |
|
| Total Shareholders' Deficit |
| |||||||||||||||
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Balance at December 31, 2017 |
|
| - |
|
| $ | - |
|
|
| 174,851,514 |
|
| $ | 17 |
|
| $ | 644,328 |
|
| $ | 7,821 |
|
| $ | (1,960,715 | ) |
| $ | 101,407 |
|
| $ | (1,207,142 | ) |
Net income |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1,838 |
|
|
| 24 |
|
|
| 1,862 |
|
At-the-market issuance of common stock, net of offering costs |
|
|
|
|
|
|
|
|
|
| 3,180,548 |
|
|
| 1 |
|
|
| 64,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 64,423 |
|
Amortization of discount of convertible preferred stock |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (2,235 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (2,235 | ) |
Other comprehensive income |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 58,470 |
|
|
| - |
|
|
| 1,380 |
|
|
| 59,850 |
|
Common stock dividends declared |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (318,865 | ) |
|
| - |
|
|
| (318,865 | ) |
Distributions to noncontrolling interest |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (7,438 | ) |
|
| (7,438 | ) |
Convertible preferred stock dividends |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (1,968 | ) |
|
| - |
|
|
| (1,968 | ) |
Net share settlement |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (1,302 | ) |
|
| - |
|
|
| (273 | ) |
|
| - |
|
|
| (1,575 | ) |
Stock-based compensation |
|
| - |
|
|
| - |
|
|
| 178,135 |
|
|
| - |
|
|
| 6,058 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 6,058 |
|
Impact of change in accounting standard |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1,859 |
|
|
| - |
|
|
| 1,859 |
|
Balance at September 30, 2018 |
|
| - |
|
| $ | - |
|
|
| 178,210,197 |
|
| $ | 18 |
|
| $ | 711,271 |
|
| $ | 66,291 |
|
| $ | (2,278,124 | ) |
| $ | 95,373 |
|
| $ | (1,405,171 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018 |
|
| - |
|
| $ | - |
|
|
| 180,535,971 |
|
| $ | 18 |
|
| $ | 757,517 |
|
| $ | 30,105 |
|
| $ | (2,373,218 | ) |
| $ | 92,375 |
|
| $ | (1,493,203 | ) |
Impact of change in accounting standard, net of tax |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (63,222 | ) |
|
| - |
|
|
| (63,222 | ) |
Net income |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 21,739 |
|
|
| 523 |
|
|
| 22,262 |
|
At-the-market issuance of common stock, net of offering costs |
|
| - |
|
|
| - |
|
|
| 1,176,186 |
|
|
| - |
|
|
| 21,641 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 21,641 |
|
Amortization of discount on convertible preferred stock |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (993 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (993 | ) |
Other comprehensive loss |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (57,557 | ) |
|
| - |
|
|
| (1,201 | ) |
|
| (58,758 | ) |
Common stock dividends declared ($0.05 per share) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (26,802 | ) |
|
| - |
|
|
| (26,802 | ) |
Distributions to noncontrolling interest |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (567 | ) |
|
| (567 | ) |
Exchange of noncontrolling interest |
|
| - |
|
|
| - |
|
|
| 666,576 |
|
|
| - |
|
|
| 6,540 |
|
|
| - |
|
|
| - |
|
|
| (6,540 | ) |
|
| - |
|
Convertible preferred stock dividends |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (875 | ) |
|
| - |
|
|
| (875 | ) |
Equity settlement convertible preferred stock |
|
| - |
|
|
| - |
|
|
| 8,677,163 |
|
|
| 1 |
|
|
| 87,499 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 87,500 |
|
Net share settlement |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (1,832 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (1,832 | ) |
Stock-based compensation |
|
| - |
|
|
| - |
|
|
| 353,498 |
|
|
| - |
|
|
| 7,930 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 7,930 |
|
Equity settled contingent consideration |
|
| - |
|
|
| - |
|
|
| 645,385 |
|
|
| - |
|
|
| 11,178 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 11,178 |
|
Issuance of common stock - employee stock purchase plan |
|
| - |
|
|
| - |
|
|
| 83,287 |
|
|
| - |
|
|
| 847 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 847 |
|
Equity component value of exchangeable note issuance, net |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 80,770 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 80,770 |
|
Deferred tax liability related to exchangeable note issuance |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (3,499 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (3,499 | ) |
Sale of common stock warrant |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 50,819 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 50,819 |
|
Payment for bond hedge option |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (70,035 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (70,035 | ) |
Balance at September 30, 2019 |
|
| - |
|
| $ | - |
|
|
| 192,138,066 |
|
| $ | 19 |
|
| $ | 948,382 |
|
| $ | (27,452 | ) |
| $ | (2,442,378 | ) |
| $ | 84,590 |
|
| $ | (1,436,839 | ) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
9
Condensed Consolidated Statements of Cash Flows
(unaudited)
|
| Nine Months Ended September 30, |
| |||||
(Thousands) |
| 2019 |
|
| 2018 |
| ||
Cash flow from operating activities |
|
|
|
|
|
|
|
|
Net income |
| $ | 22,262 |
|
| $ | 1,862 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 307,571 |
|
|
| 342,311 |
|
Amortization of deferred financing costs and debt discount |
|
| 30,045 |
|
|
| 18,340 |
|
Deferred income taxes |
|
| (6,137 | ) |
|
| (6,081 | ) |
Straight-line revenues |
|
| (1,450 | ) |
|
| (10,932 | ) |
Stock-based compensation |
|
| 7,930 |
|
|
| 6,058 |
|
Change in fair value of contingent consideration |
|
| (28,530 | ) |
|
| (687 | ) |
Gain on sale of real estate |
|
| (28,995 | ) |
|
| - |
|
Loss on sale of Uniti Fiber Midwest operations |
|
| 2,242 |
|
|
| - |
|
Loss on asset disposal |
|
| 5,206 |
|
|
| 2,721 |
|
Other |
|
| 156 |
|
|
| - |
|
Changes in assets and liabilities, net of acquisitions: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
| 15,885 |
|
|
| (14,848 | ) |
Other assets |
|
| 4,560 |
|
|
| (4,899 | ) |
Accounts payable, accrued expenses and other liabilities |
|
| 56,551 |
|
|
| 66,090 |
|
Deferred revenue from prepaid rent - Bluebird / Uniti Fiber Midwest networks (Note 5) |
|
| 174,500 |
|
|
| - |
|
Net cash provided by operating activities |
|
| 561,796 |
|
|
| 399,935 |
|
Cash flow from investing activities |
|
|
|
|
|
|
|
|
Acquisition of businesses, net of cash acquired |
|
| (4,211 | ) |
|
| - |
|
Bluebird asset acquisition |
|
| (318,990 | ) |
|
| - |
|
Proceeds from sale of Uniti Fiber Midwest operations |
|
| 6,400 |
|
|
| - |
|
NMS asset acquisitions |
|
| - |
|
|
| (3,299 | ) |
Other capital expenditures |
|
| (264,862 | ) |
|
| (297,108 | ) |
Proceeds from sale of real estate, net of cash |
|
| 130,429 |
|
|
| - |
|
Net cash used in investing activities |
|
| (451,234 | ) |
|
| (300,407 | ) |
Cash flow from financing activities |
|
|
|
|
|
|
|
|
Principal payments on debt |
|
| (15,810 | ) |
|
| (15,810 | ) |
Dividends paid |
|
| (129,075 | ) |
|
| (318,116 | ) |
Payments of contingent consideration |
|
| (32,253 | ) |
|
| (18,640 | ) |
Distributions paid to noncontrolling interest |
|
| (2,873 | ) |
|
| (7,438 | ) |
Borrowings under revolving credit facility |
|
| 139,000 |
|
|
| 350,000 |
|
Payments under revolving credit facility |
|
| (203,981 | ) |
|
| (90,000 | ) |
Capital lease payments |
|
| (3,179 | ) |
|
| (3,819 | ) |
Payments for financing costs |
|
| (49,497 | ) |
|
| - |
|
Common stock issuance, net of costs |
|
| 21,641 |
|
|
| 64,423 |
|
Proceeds from issuance of notes |
|
| 345,000 |
|
|
| - |
|
Proceeds from sale of warrants |
|
| 50,819 |
|
|
| - |
|
Payment for bond hedge option |
|
| (70,035 | ) |
|
| - |
|
Employee stock purchase program |
|
| 847 |
|
|
| - |
|
Net share settlement |
|
| (1,832 | ) |
|
| (1,575 | ) |
Net cash provided by (used in) financing activities |
|
| 48,772 |
|
|
| (40,975 | ) |
Effect of exchange rates on cash and cash equivalents |
|
| (43 | ) |
|
| 175 |
|
Net increase in cash and cash equivalents |
|
| 159,291 |
|
|
| 58,728 |
|
Cash and cash equivalents at beginning of period |
|
| 38,026 |
|
|
| 59,765 |
|
Cash and cash equivalents at end of period |
| $ | 197,317 |
|
| $ | 118,493 |
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
10
Property and equipment acquired but not yet paid |
| $ | 19,947 |
|
| $ | 11,446 |
|
Tenant capital improvements |
|
| 122,577 |
|
|
| 124,036 |
|
Settlement of convertible preferred stock, Series A Shares |
|
| 87,500 |
|
|
| - |
|
Settlement of contingent consideration through non-cash consideration |
|
| 11,178 |
|
|
| - |
|
Exchange of noncontrolling interest through non-cash consideration |
|
| 6,540 |
|
|
| - |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
11
Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
Note 1. Organization and Description of Business
Uniti Group Inc. (the “Company,” “Uniti,” “we,” “us,” or “our”) was incorporated in the state of Delaware in February 2014 and reorganized in the state of Maryland on September 4, 2014. We are an internally managed real estate investment trust (“REIT”) engaged in the acquisition and construction of mission critical infrastructure in the communications industry. We are principally focused on acquiring and constructing fiber optic broadband networks, wireless communications towers, copper and coaxial broadband networks and data centers. We manage our operations in four 4 separate lines of business: Uniti Fiber, Uniti Towers, Uniti Leasing, and the Consumer CLEC Business.
The Company operates through a customary “up-REIT” structure, pursuant to which we hold substantially all of our assets through a partnership, Uniti Group LP, a Delaware limited partnership (the “Operating Partnership”), that we control as general partner, with the only significant difference between the financial position and results of operations of the Operating Partnership and its subsidiaries compared to the consolidated financial position and consolidated results of operations of Uniti is that the results for the Operating Partnership and its subsidiaries do not include Uniti’s Consumer CLEC segment, which consists of Talk America Services. 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. WeAs of September 30, 2019, we are the sole general partner of the Operating Partnership and own approximately 97.7%98.2% of the partnership interests in the Operating Partnership as of September 30, 2018 and December 31, 2017, respectively.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-ownedwholly owned and/or controlled subsidiaries, which consist ofincluding 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 byas 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 for the year ended December 31, 20172018 (“Annual Report”), filed with the SEC on March 1, 2018.18, 2019. 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.
Going Concern—In accordance with Accounting Standards Update ("ASU") 2014-15, Disclosure of Credit Risks—We Uncertainties about an Entity's Ability to Continue as a Going Concern (Subtopic 205-40), the Company’s management has evaluated whether there are partyconditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a Master Lease agreement (the “Master Lease”) with Windstream Holdings, Inc. (“Windstream Holdings” and together with its subsidiaries, “Windstream”) from which substantially all of Uniti’s leasing revenuesgoing concern within one year after the date the accompanying Condensed Consolidated Financial Statements are issued.
1012
Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements – Continued
(unaudited)
We are party to a master lease agreement (the “Master Lease”) with Windstream Holdings, Inc. (“Windstream Holdings” and operatingtogether with its consolidated subsidiaries “Windstream”), from which 68.2% of our revenue for the year ended December 31, 2018 was derived. Windstream was involved in litigation with an entity who acquired certain Windstream debt securities and thereafter issued a notice of default as to such securities related to our spin-off from Windstream (the “Spin-Off”). Windstream challenged the matter in federal court and a trial was held in July 2018. On February 15, 2019, the federal court judge issued a ruling against Windstream, finding that Windstream’s attempts to waive such default were not valid, that an “event of default” occurred with respect to such debt securities, and that the holder’s acceleration of such debt in December 2017 was effective. In response to the adverse outcome, on February 25, 2019, Windstream filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York.
In bankruptcy, Windstream has the option to assume or reject the Master Lease. Because the Master Lease is a single indivisible Master Lease with a single rent payment, it must be assumed or rejected in whole and cannot be sub-divided by facility or market absent Uniti’s consent. A significant amount of Windstream’s revenue is generated from the use of our network included in the Master Lease, and we believe that the Master Lease is essential to Windstream’s operations. Furthermore, Windstream is designated as a “carrier of last resort” in certain markets where it utilizes the Master Lease to provide service to its customers, and Windstream would require approval from the Public Utility Commissions and the Federal Communications Commission to cease providing service in those markets. As a result, we believe the probability of Windstream rejecting the Master Lease in bankruptcy to be remote. Windstream has filed claims against us alleging, among other things: that the Master Lease should be recharacterized as a financing transaction, which would impact its treatment in Windstream’s bankruptcy (including potentially through changing our status to that of a creditor that would share in creditor recoveries from the estate rather than receive rent payments) and which could affect our status as a REIT; that the Master Lease is a lease of personal property; and that rent payments and tenant capital improvements made by Windstream under the Master Lease since at least the third quarter of 2017 constitute constructive fraudulent transfers. A mediation of these claims is ongoing in Windstream’s bankruptcy. In connection with the mediation, Uniti has agreed to an extension of the assumption deadline for the Master Lease to December 7, 2019. In exchange, Windstream has provided certain assurances regarding the continued payment of rent pursuant to the Master Lease during the extension period and, following the expiration of the extension period, Windstream will continue to make payments under the Master Lease as they come due, unless and until Windstream obtains an order from the bankruptcy court permitting cessation of such payments. A rejection of the Master Lease, an adverse determination by a judge on Windstream’s claims against us, or even a temporary disruption in payments to us, may require us to fund certain expenses and obligations (e.g., real estate taxes, insurance and maintenance expenses) to preserve the value of our properties, and could materially adversely affect our consolidated results of operations, liquidity and financial condition, including our ability to service debt, comply with debt covenants and maintain our status as a REIT. As a result, conditions or events have been identified that raise substantial doubt about the Company’s ability to continue as a going concern.
The Company has considered the mitigating effects of management’s plans to alleviate the substantial doubt about the ability to continue as a going concern in the event there is a disruption in the payments due to us under the Master Lease prior to Windstream’s assumption or rejection of the lease, or in the event Windstream rejects the lease or if there is any adverse determinations in respect of Windstream’s claims. Those plans include deferring, reducing or delaying cash flowsdividends and capital expenditures, if necessary, paying one or more dividends that are currently derived. required to maintain our REIT status in shares to the extent allowed under the IRS REIT rules, curtailing acquisition activities, accessing the capital markets and identifying alternative sources of liquidity. Based on our analysis, including consideration of the timing of petitioners’ requirements to make post-petition lease payments under U.S. bankruptcy law, and absent any adverse determination in respect to Windstream’s claims or disruptions in rent payments under the Master Lease, we believe that we have adequate liquidity to continue to fund our operations for twelve months after the issuance of the accompanying Condensed Consolidated Financial Statements absent any adverse determination in respect to Windstream’s claims or disruptions in rent payments under the Master Lease. If our assumptions are incorrect, we could need additional sources of liquidity to fund our cash needs and cannot assure that we will obtain them. A rejection of the Master Lease, an adverse determination by a judge on Windstream’s claims against us, or even a temporary disruption in payments to us, may require us to fund certain expenses and obligations (e.g., real estate taxes, insurance and maintenance expenses) to preserve the value of our properties, and could materially adversely affect our consolidated results of operations, liquidity and financial condition, including our ability to service debt, comply with financial and other covenants and maintain our status as a REIT.
Although management has concluded the probability of a rejection of the Master Lease to be remote, and has noted the absence of any provision in the Master Lease that contemplates renegotiation of the lease and the lack of any ability of the bankruptcy court to unilaterally reset the rent or terms of the lease, it is difficult to predict what could occur in Windstream’s bankruptcy restructuring, including any judicial decisions in respect of claims against us by Windstream or its creditors. The Company has evaluated its ability
13
Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements – Continued
(unaudited)
to continue as a going concern in light of the possibility of a consensual renegotiation of the Master Lease, and the impact of any renegotiated lease on our compliance with our debt covenants. We note that our Credit Agreement prohibits the Company from amending the Master Lease in a manner that, among other provisions, pro forma for any such amendment, would result in a consolidated secured leverage ratio that exceeds 5.0 to 1.0. Furthermore, management has no intention to enter into a lease amendment that would violate our debt covenants.
However, there can be no certainty as to the outcome of judicial decisions or Windstream’s decision to assume or reject the Master Lease, and uncertainties exist as to the outcome or impacts of any potential consensual renegotiation of the Master Lease. Therefore, substantial doubt exists about our ability to continue as a going concern within one year after the issuance of the financial statements.
The accompanying Condensed Consolidated Financial Statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. The accompanying Condensed Consolidated Financial Statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Concentration of Credit Risks—Revenue under the Master Lease provided 69.6%65.3% and 76.6%69.6% of our revenue for the nine months ended September 30, 20182019 and 2017,2018, respectively. Because a substantial portion of our revenue and cash flows are derived from lease payments by Windstream pursuant to the Master Lease, 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 Master Lease, succeed in its claim against us or otherwise experiences operating or liquidity difficulties and becomes unable to generate sufficient cash to make payments to us. In recent years, Windstream has experienced annual declines in its total revenue, sales and cash flow, and has had its credit ratings downgraded by nationally recognized credit rating agencies multiple times over the past 12 months, and as recently as June 2018. In addition, Windstream is involved in litigation with an entity who acquired certain Windstream debt securities and thereafter issued a notice of default as to such securities relating to our spin-off from Windstream. On December 7, 2017, the entity issued a notice of acceleration to Windstream claiming that the alleged default had matured into an “event of default” and that the principal amount, along with accrued interest, of such securities was due and payable immediately. Windstream challenged the matter in federal court and a trial was held, in July 2018. As of the date of this quarterly report, a verdict has not been issued. If Windstream receives an adverse ruling (and the ruling is not stayed or is final and unappealable), an actual “event of default” would result. An actual “event of default” would trigger cross-default provisions in Windstream’s other debt instruments, including Windstream Services’ existing credit facility and notes, which, in turn, would trigger a default under the Master Lease. In addition, Windstream is dependent upon distributions from its subsidiaries to fund its rental payments, and its subsidiaries’ debt instruments generally prohibit such distributions upon any event of default. If an adverse outcome occurs with respect to this matter and Windstream does not have the ability to pay under the Master Lease, there could be a material adverse impact to us.
Accordingly, we monitor the credit quality of Windstream through numerous methods, including by (i) reviewing the credit ratings of Windstream by nationally recognized credit rating agencies, (ii) reviewing the financial statements of Windstream that are publicly available and that are required to be delivered to us pursuant to the Master Lease, (iii) monitoring ongoing litigation and news reports regarding Windstream and its businesses, (iv) conducting research to ascertain industry trends potentially affecting Windstream, and (v) monitoring the timeliness of its lease payments.
Windstream is a publicly traded company and is subject to the periodic filing requirements of the Securities Exchange Act of 1934, as amended. Windstream filings can be found at www.sec.gov. Windstream filings are not incorporated by reference in this Quarterly Report on Form 10-Q.
Income TaxesStraight-Line Revenue Receivable—The Tax Cuts and Jobs ActAs discussed in “Recently Issued Accounting Standards” in this Note 2, we have adopted ASU No. 2016-02, Leases (“Tax Bill”ASC 842”) was enacted on December 22, 2017. The Tax Bill reduceseffective January 1, 2019. This standard supersedes prior guidance regarding the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earningsevaluation of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. Consistentcollectability of lease receivables, including straight-line revenue receivables. We have evaluated the collectability of our straight-line revenue receivable associated with Staff Accounting Bulletin No. 118 issued by the SEC, which provides for a measurement period of one year from the enactment date to finalize the accounting for effects of the Tax Bill, the Company provisionally recorded an income tax benefit of $17.0 million related to the Tax BillMaster Lease in the fourth quarter of 2017. During the second quarter of 2018, the purchase price allocations related to our acquisitions of Hunt Telecommunications, LLC and Southern Light, LLC were adjusted to record additional deferred tax liabilities of $3.2 million and $0.9 million, respectively, that existed as of the acquisition date. These deferred tax liabilities were recorded at the tax rate in effect as ofaccordance with ASC 842. At the date of acquisition. Upon enactmentadoption, due to uncertainties surrounding Windstream’s operations and liquidity, including uncertainties surrounding the outcome of Windstream’s pending litigation, we concluded that the Tax Bill, the incremental deferred tax liability would have been adjusted to the newly enacted corporate tax rate. This resulted inreceivable should be written off. As a decrease to the deferred tax liability and an income tax benefit of $1.3 million recorded for the three months ended June 30, 2018. As of September 30, 2018, we have not yet completed our accounting for the tax effects of the enactment of the Tax Bill. Future regulatory and rulemaking interpretations or other guidance clarifying provisions of the Tax Bill could affect the Company’s analysis and tax position.
Reclassifications—Certain prior year asset categories and related amounts in Note 6 have been reclassified to conform with current year presentation.
Recently Issued Accounting Standards
In August 2017, the FASB issued Accounting Standards Update (“ASU”) No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”), which amends and simplifies existing guidance in order to allow companies to more accurately present the economic effects of risk management activities in the financial statements. ASU 2017-12 is effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods, and earlier adoption is permitted. We adopted ASU 2017-12result, effective January 1, 2018,2019, the Master Lease will be accounted for on a cash basis in accordance with ASC 842, until a time at which there is more certainty regarding Windstream’s decision to assume or reject the Master Lease. At the adoption of ASC 842, we reflected the write off as a $61.5 million adjustment to equity resulting from the change in accounting standard.
Exchangeable Notes and thereRelated Transactions—On June 28, 2019, Uniti Fiber Holdings, Inc. (“Uniti Fiber”), 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’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’s non-convertible debt borrowing rate. The carrying amount of the liability component was no material impact on our financial positioncalculated by measuring the fair value of a similar liability that does not have an associated conversion feature. See Note 10.
In connection with the offering of the Exchangeable Notes, Uniti Fiber entered into exchangeable note hedge transactions with respect to the Company’s common stock (the “Note Hedge Transactions”) with certain of the Initial Purchasers (as defined in Note 10) or their respective affiliates (collectively, the “Counterparties”). In addition, 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 $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 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 Notes Hedge
1114
Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements – Continued
(unaudited)
Transactions are not accounted for as derivatives that must be remeasured each reporting period and instead, are recorded in stockholders’ equity. See Note 8In February 2017,.
Reclassifications—Certain prior year asset categories and related amounts in Note 7 have been reclassified to conform with current year presentation.
Transaction Related and Other Costs—The Company expenses non-capitalizable transaction related and other costs in the FASB issued ASU No. 2017-05, Other Income - Gainsperiod in which they are incurred and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidanceservices are received. Transaction related costs include incremental acquisition pursuit, transaction and Accounting for Partial Sales of Nonfinancial Assets (“ASU 2017-05”integration costs, including unsuccessful acquisition pursuit costs. Pursuit and transaction costs include professional services (legal, accounting, advisory, regulatory, etc.), which provides guidance for recognizing gainsfinder’s fees, travel expenses, and losses fromother direct expenses associated with an 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 13), and costs associated with the transferimplementation of nonfinancial assets and for partial salesour new enterprise resource planning system are included within this line item on the Condensed Consolidated Statements of nonfinancial assets, and is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2017. We adopted ASU 2017-05 effectiveIncome.
Recently Issued Accounting Standards
Leases—Effective January 1, 2018, using the modified retrospective approach and there was no material impact on our financial position.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 provides guidance on reducing the diversity2019, we account for leases in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. In addition to other specific cash flow issues, ASU 2016-15 provides clarification on when an entity should separate cash receipts and cash payments into more than one class of cash flows and when an entity should classify those cash receipts and payments into one class of cash flows on the basis of predominance.accordance with ASC 842. The new guidance is effective for the fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. We adopted ASU 2016-15 effective January 1, 2018, and there was no material impact on our financial position.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“Topic 606”). This update outlines a single comprehensive revenue recognition model for entities to follow in accounting for revenue from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity should recognize revenue for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to receive for those goods or services. Topic 606 is effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods. We adopted Topic 606 as of January 1, 2018 using the modified retrospective transition method. See Note 3.
In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASC 842”), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The new standard requires lessees to apply a dual approach, classifying 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, or as a single lease cost recognized on a straight linestraight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-usean ROU asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. The accounting for lessors remains largely unchanged from existing guidance.unchanged. Leases with a term of 12 months or less will be accounted for similar toconsistent with existing guidance for operating leases today.
We determine if an arrangement is a lease at contract inception. A lease exists when a contract conveys to the customer the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. The provisionsdefinition of this guidance are effective for annual periods beginning after December 31, 2018,a lease embodies two conditions: (i) there is an identified asset in the contract that is land or a depreciable asset (i.e., property, plant, and for interim periods therein. The Company is currently evaluating this guidanceequipment), and (ii) the customer has the right to determinecontrol the impact it will have on our financial statements by reviewing its existing operatinguse of the identified asset.
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. The Company expects a gross-up of its Consolidated Balance Sheets as a result of recognizing lease liabilitiesOperating leases where we are the lessor are included in Leasing, Fiber Infrastructure and right-of-use assets; the extent of the impact of a gross-up is under evaluation. The Company does not anticipate material changes to the recognition of operating lease expense in itsTower revenues on our Condensed Consolidated Statements of Income.
In January 2018,From time to time we enter into direct financing lease arrangements that include (i) a lessee obligation to purchase the FASB issued ASU 2018-01, Leases (Topic 842) – Land Easement Practical Expedient for Transition to Topic 842. This standard permits an entity to elect an optional transition practical expedient to not evaluate land easementsleased equipment at the end of the lease term, (ii) a bargain purchase option, (iii) a lease term having a duration that exist or expire before the Company's adoption of ASC 842 and that were not previously accounted for as leases under ASC 840. The Company intends to elect this transition provision.
Adoption of ASC Topic 606, Revenue from Contracts with Customers
Exceptis for the changes below,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 have consistently appliedare the accounting policieslessee are included in other assets and accounts payable, accrued expenses and other liabilities, respectively, on our Condensed Consolidated Balance Sheets. The lease liabilities are initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date.
ROU assets and lease liabilities related to all periods presentedfinance leases where we are the lessee are included in theseproperty, plant and equipment, net and finance lease obligations, respectively, on our Condensed 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.
15
Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements.Statements – Continued
On January 1, 2018,(unaudited)
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 adopted Topic 606are 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, the lessee is placed on non-accrual status and Leasing revenue is recognized when cash payments are received.
The ROU asset is initially measured at cost, which comprises 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 modified retrospectivestraight-line method wherebyfrom the cumulative effectlease commencement date to the earlier of initially applying Topic 606the 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 Condensed Consolidated Statements of Income 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 profit or loss.
We have lease agreements which include lease and nonlease components. For both leases where we are a lessor and leases where we are a lessee, we have elected to combine lease and nonlease components for all lease contracts. Nonlease components that are combined with lease components are primarily maintenance services related to the leased asset. Where we are the lessor, we determine whether the lease or nonlease component is the predominant component on a case-by-case basis. For all existing leases where we are the lessor, ASC Topic 842 has been applied to all combined components.
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 adjustmentexpense on a straight-line basis over the lease term.
We have elected to the opening balance of equity at January 1, 2018. Therefore, comparative information has not been adjusted and continues to be reported under ASC 605, Revenue Recognition. We recordedexclude sales taxes from lease payments in arrangements where we are a net increase tolessor.
1216
Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements – Continued
(unaudited)
opening retained earnings of $1.9 millionWe adopted ASC 842 using a modified retrospective transition approach as of the effective date as permitted by the amendments in ASU 2018-11, Leases (Topic 842):Target Improvements, which provides an alternative modified retrospective transition method. As a result, we were not required to adjust our comparative period financial information for effects of the standard or make the new required lease disclosures for periods before the date of adoption (i.e. January 1, 2018 due2019). We have elected to adopt the cumulative impactpackage of adopting Topic 606, withtransition practical expedients and, therefore, have not reassessed (i) whether existing or expired contracts contain a lease, (ii) lease classification for existing or expired leases or (iii) the impact primarily related to commissionaccounting for initial direct costs that are capitalized under Topic 606 which were previously expensed.
The detailscapitalized. We elected the practical expedient to use hindsight for leases existing at the adoption date. Further, we elected to adopt the amendments in ASU 2018-01, Land Easement Practical Expedientfor Transition to Topic 842, which permits an entity to elect an optional transaction practical expedient to not evaluate land easements that exist or expire before the Company’s adoption of the significant changesASC 842 and quantitative impact of the changes are set out below. We have applied this guidance only to contracts that were not completedpreviously accounted for as of January 1, 2018, the date of initial application.leases under ASC 840, Leases (“ASC 840”).
Commissions
We previously recognized commission fees related to obtaining a contract as selling expenses when incurred. Under Topic 606 and Topic 340, Other Assets and Deferred Costs, when they are incremental or expected to be recovered, we capitalize those commission fees as costs of obtaining a contract and amortize them consistentlyIn connection with the pattern of transfer of the product or service to which the asset relates. These amortized costs are included in general and administrative expense on the Condensed Consolidated Statements of Income. These deferred balances were $4.2 million and $2.5 million at September 30, 2018 and January 1, 2018, respectively, and included in Other Assets on the Condensed Consolidated Balance Sheets; Other Assets would have been lower by those amounts under revenue recognition and cost guidance applicable to us prior to the adoption of Topic 606 and Topic 340. ForASC 842, we have recorded an adjustment to equity of $63.2 million, net of tax for the three and nine months ended September 30, 2018,cumulative effect from a change in accounting standard. Of this amount, $61.5 million related to the impact to costs as a resultwrite-off of applying Topic 606 was a decrease of $0.5 millionthe Master Lease straight-line revenue receivable, and $1.7 million respectively, as comparedrelates to what the generalestablishment of the ROU assets and administrative expense would have been under previous revenue and cost recognition guidance. There would have been no other differences in our Condensed Consolidated Balance Sheet as of September 30, 2018 or Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2018 under previous revenue and cost recognition guidance as compared to Topic 606 and Topic 340.lease liabilities.
Nature of goods and servicesNote 3. Revenues
The following is a description of principal activities, separated by reportable segments (see Note 1112), from which the Company generates its revenues.
Leasing
Leasing revenue represents the results from our leasing program,business, Uniti Leasing, which is engaged in the acquisition of mission-critical communications assets and leasing them back to anchor customers on either an exclusive or shared-tenant basis. Due to the nature of these activities, they are outside the scope of the guidance of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“Topic 606,606”), and are recognized under other applicable guidance, including ASC 840, Leases (“Topic 840”)842 and, for periods prior to January 1, 2019, ASC 840. See Note 4.
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, (ii) E-rate, (iii) small cell, (iv) construction services, (v) dark fiber and (vi) other revenue generating activities.
| i. | Consumer, enterprise, wholesale, and backhaul lit fiber fall under the guidance of Topic 606. 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 is governed by Topic 606. 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. |
13
Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements – Continued
(unaudited)
services constitute a lease, and as such, they are outside the scope of Topic 606 and are governed by other applicable 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 |
17
Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements – Continued
(unaudited)
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 under |
| 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 towers business, Uniti Towers, through which we acquire and construct tower and tower-related real estate, which we then lease to our customers in the United States and Latin America.States. Revenue from our towers business qualifies as a lease under TopicASC 842, and ASC 840 for periods prior to January 1, 2019, and is outside the scope of Topic 606.
Consumer CLEC
The Consumer CLEC segment represents the operations of Talk America Services (“Talk America”) through which we operate the Consumer CLEC Business, which provides local telephone, high-speed internet and long-distance services to customers in the eastern and central United States. Customers are 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.
Disaggregation of Revenue
The following table presents our revenues disaggregated by revenue stream.
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(Thousands) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Revenue disaggregated by revenue stream |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from contracts with customers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiber Infrastructure |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lit backhaul |
| $ | 31,449 |
|
| $ | 32,920 |
|
| $ | 97,055 |
|
| $ | 99,740 |
|
Enterprise and wholesale |
|
| 21,591 |
|
|
| 16,052 |
|
|
| 57,561 |
|
|
| 47,032 |
|
E-Rate and government |
|
| 18,879 |
|
|
| 16,463 |
|
|
| 63,407 |
|
|
| 44,850 |
|
Other |
|
| 475 |
|
|
| 887 |
|
|
| 2,158 |
|
|
| 2,755 |
|
Fiber Infrastructure |
| $ | 72,394 |
|
| $ | 66,322 |
|
| $ | 220,181 |
|
| $ | 194,377 |
|
Consumer CLEC |
|
| 2,729 |
|
|
| 3,365 |
|
|
| 8,663 |
|
|
| 10,752 |
|
Total revenue from contracts with customers |
|
| 75,123 |
|
|
| 69,687 |
|
|
| 228,844 |
|
|
| 205,129 |
|
Revenue accounted for under other applicable guidance |
|
| 188,506 |
|
|
| 182,949 |
|
|
| 560,230 |
|
|
| 541,751 |
|
Total revenue |
| $ | 263,629 |
|
| $ | 252,636 |
|
| $ | 789,074 |
|
| $ | 746,880 |
|
At September 30, 2019, and December 31, 2018, lease receivables were $26.3 million and $45.5 million, respectively, and receivables from contracts with customers were $60.4 million and $57.1 million, respectively.
1418
Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements – Continued
(unaudited)
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| |||||||||||
(Thousands) |
| 2018 |
|
| 2017(1) |
|
| 2018 |
|
| 2017(1) |
| ||||
Revenue disaggregated by revenue stream |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from contracts with customers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiber Infrastructure |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lit backhaul |
| $ | 32,920 |
|
| $ | 35,108 |
|
| $ | 99,740 |
|
| $ | 83,656 |
|
Enterprise and wholesale |
|
| 16,052 |
|
|
| 14,471 |
|
|
| 47,032 |
|
|
| 21,392 |
|
E-Rate and government |
|
| 16,463 |
|
|
| 15,101 |
|
|
| 44,850 |
|
|
| 28,850 |
|
Other |
|
| 887 |
|
|
| (19 | ) |
|
| 2,755 |
|
|
| (297 | ) |
Fiber Infrastructure |
| $ | 66,322 |
|
| $ | 64,661 |
|
| $ | 194,377 |
|
| $ | 133,601 |
|
Consumer CLEC |
|
| 3,365 |
|
|
| 4,378 |
|
|
| 10,752 |
|
|
| 13,966 |
|
Total revenue from contracts with customers |
|
| 69,687 |
|
|
| 69,039 |
|
|
| 205,129 |
|
|
| 147,567 |
|
Revenue accounted for under other applicable guidance |
|
| 182,949 |
|
|
| 176,171 |
|
|
| 541,751 |
|
|
| 522,129 |
|
Total revenue |
| $ | 252,636 |
|
| $ | 245,210 |
|
| $ | 746,880 |
|
| $ | 669,696 |
|
|
|
At September 30, 2018, and January 1, 2018, lease receivables were $20.1 million and $10.9 million, respectively, and receivables from contracts with customers were $36.8 million and $31.2 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. 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 and nine months ended September 30, 2019, we recognized revenues of $0.8million and $3.3 million, respectively, that was included in the December 31, 2018 contract liabilities balance.
The following table provides information about contract assets and contract liabilities accounted for under Topic 606.
(Thousands) |
| Contract Assets |
|
| Contract Liabilities |
| ||
Balance at January 1, 2018 |
| $ | 2,490 |
|
| $ | 26,256 |
|
Revenue recognized that was included in the contract liability balance at the beginning of the period |
|
| - |
|
|
| (7,826 | ) |
Increases due to revenue recognized, and not billed during the period |
|
| 11,583 |
|
|
| - |
|
Increases due to cash received, excluding amounts recognized as revenue during the period |
|
| - |
|
|
| 4,041 |
|
Transferred to receivables from contract assets, recognized at the beginning of the period |
|
| (8,214 | ) |
|
| - |
|
Balance at September 30, 2018 |
| $ | 5,859 |
|
| $ | 22,471 |
|
(Thousands) |
| Contract Assets |
|
| Contract Liabilities |
| ||
Balance at December 31, 2018 |
| $ | 5,540 |
|
| $ | 15,473 |
|
Balance at September 30, 2019 |
| $ | 11,116 |
|
| $ | 14,128 |
|
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 assets primarily relate costs incremental to obtaining contracts and contract liabilities primarily relate to deferred revenue from non-recurring charges.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 September 30, 2018,2019, our future revenues (i.e., transaction price related to remaining performance obligations) under contract accounted for under Topic 606 totaled $672.5 598.4million, of which $597.0$526.7 million is related to contracts that are currently being invoiced and have an average remaining contract term of 2.92.5 years, while $75.571.7 million represents our backlog for sales bookings which have yet to be installed and have an average remaining contract term of4.55.1 years.
15
Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements – Continued
(unaudited)
Practical Expedients and Exemptions
We do not disclose the value of unsatisfied performance obligations for contracts that have an original expected duration of one year or less.
We exclude from the transaction price any amounts collected from customers for sales taxes and therefore, theysuch amounts are not included in revenue.
Note 4. Business CombinationsLeases
Lessor Accounting
We lease communications towers, ground, communications equipment, and Asset Acquisitionsdark fiber to tenants under operating leases. Our leases have initial lease terms ranging from five to 20 years, most of which includes options to extend or renew the leases for five to 80 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.
2017 Transactions
Asset Acquisitions
Network Management Holdings LTD
On January 31, 2017, we completed the acquisitionThe components of Network Management Holdings LTD (“NMS”). The Company accountedlease income for the acquisition of NMS as an asset purchase. At close, NMS ownedthree and operated 366 wireless communications towers in Latin America with an additional 105 build to suit tower sites under development. The NMS portfolio spans three Latin American countries with 212 towers in Mexico, 54 towers in Nicaragua, and 100 towers in Colombia. The consideration for the 366 wireless towers in operation as of the transaction close date was $62.6 million, which was funded through cash on hand, and is presented as NMS asset acquisition on the Condensed Consolidated Statements of Cash Flows. NMS conducts its operations through three non-U.S. subsidiaries and the Company has determined that the functional currencies for the Mexican, Nicaraguan and Colombian subsidiaries are the Mexican Peso, U.S. Dollar and Colombian Peso, respectively. The non-U.S. subsidiaries in which NMS conducts its operations are subject to income tax in the jurisdictions in which they operate. The acquisition did not result in a step up in tax basis under local law. The Company recorded a net deferred tax liability of $18.4 million and a liability for unrecognized tax benefits of $5.3 million in connection with the acquisition. The deferred tax liability is primarily related to the excess of the recorded amounts for Property, Plant & Equipment and Intangibles over their respective historical tax bases. Under the terms of the purchase agreement, we will acquire the towers under development when construction is completed. The NMS towers are reflected in our Towers segment. See Note 11. The following is a summary of the estimated fair values of the assets acquired and liabilities assumed:
|
| (thousands) |
| |
Property, plant and equipment |
| $ | 36,417 |
|
Accounts receivable |
|
| 2,826 |
|
Other assets |
|
| 1,623 |
|
Intangible assets |
|
| 52,437 |
|
Accounts payable, accrued expenses and other liabilities |
|
| (8,895 | ) |
Intangible liabilities |
|
| (3,440 | ) |
Deferred income taxes |
|
| (18,403 | ) |
Total purchase consideration |
| $ | 62,565 |
|
Of the $52.4 million of acquired intangible assets, $37.4 million was assigned to tenant contracts (22 year life), $13.5 million was assigned to network (22 year life) and $1.5 million was assigned to acquired above-market leases (10 year life). The acquired below-market lease intangible liability of $3.4 million has a 10 year life. See Note 8.
During the nine months ended September 30, 2018, construction was completed on 39 of the towers that were under development at the time of the NMS acquisition and we acquired the completed towers pursuant to the purchase agreement for approximately $3.3 million. As of September 30, 2018, we acquired 89 of the 105 towers that were under development at the time of NMS acquisition, and 16 of the development towers were cancelled and will not be completed and purchased.2019 are as follows:
Business Combinations
Southern Light, LLC
(Thousands) |
| Three Months Ended September 30, 2019 |
|
| Nine Months Ended September 30, 2019 |
| ||
Lease income - operating leases |
| $ | 188,506 |
|
| $ | 560,230 |
|
1619
Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements – Continued
(unaudited)
Lease payments to be received under non-cancellable operating leases where we are the lessor for the remainder of the lease terms are as follows:
(Thousands) |
| September 30, 2019 (1) |
|
| December 31, 2018 (2) |
| ||
2019 |
| $ | 177,639 |
|
| $ | 724,269 |
|
2020 |
|
| 730,486 |
|
|
| 693,596 |
|
2021 |
|
| 724,909 |
|
|
| 696,713 |
|
2022 |
|
| 727,167 |
|
|
| 699,561 |
|
2023 |
|
| 730,184 |
|
|
| 702,663 |
|
Thereafter |
|
| 4,983,671 |
|
|
| 4,706,951 |
|
Total lease receivables |
| $ | 8,074,056 |
|
| $ | 8,223,753 |
|
(1) Total future minimum lease payments to be received include $7.2 billion relating to the Master Lease with Windstream. |
| |||||||
(2) Prior period amounts have not been adjusted under the modified retrospective transition approach. |
|
The underlying assets under operating leases where we are the lessor as of September 30, 2019 are summarized as follows:
(Thousands) |
| September 30, 2019 |
| |
Land |
| $ | 27,392 |
|
Building and improvements |
|
| 340,995 |
|
Real property interest |
|
| - |
|
Poles |
|
| 257,116 |
|
Fiber |
|
| 2,801,312 |
|
Equipment |
|
| 345 |
|
Copper |
|
| 3,774,931 |
|
Conduit |
|
| 89,770 |
|
Tower assets |
|
| 146,401 |
|
Capital lease assets |
|
| 32,660 |
|
Other assets |
|
| 10,262 |
|
|
|
| 7,481,184 |
|
Less: accumulated depreciation |
|
| (4,965,928 | ) |
Underlying assets under operating leases, net |
| $ | 2,515,256 |
|
Depreciation expense for the underlying assets under operating leases where we are the lessor for the three and nine months ended September 30, 2019 is summarized as follows:
(Thousands) |
| Three Months Ended September 30, 2019 |
|
| Nine Months Ended September 30, 2019 |
| ||
Depreciation expense for underlying assets under operating leases |
| $ | 73,606 |
|
| $ | 224,973 |
|
Lessee Accounting
We have commitments under operating leases for communications towers, ground, colocation and dark fiber lease arrangements. We also have finance leases for dark fiber lease arrangements and other communications equipment. Our leases have initial lease terms ranging from less than one year to 30 years, most of which includes options to extend or renew the leases for less than one year to 85 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 September 30, 2019, we have short term lease commitments amounting to approximately $1.8 million, for colocation and dark fiber arrangements.
The components of lease cost for the three and nine months ended September 30, 2019 are as follows:
20
Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements – Continued
(unaudited)
(Thousands) |
| Three Months Ended September 30, 2019 |
|
| Nine Months Ended September 30, 2019 |
| ||
Finance lease cost |
|
|
|
|
|
|
|
|
Amortization of ROU assets |
| $ | 1,283 |
|
| $ | 3,179 |
|
Interest on lease liabilities |
|
| 1,571 |
|
|
| 3,192 |
|
Total finance lease cost |
|
| 2,854 |
|
|
| 6,371 |
|
Operating lease cost |
|
| 6,024 |
|
|
| 19,278 |
|
Short-term lease cost |
|
| 522 |
|
|
| 1,451 |
|
Variable lease cost |
|
| 47 |
|
|
| 304 |
|
Less sublease income |
|
| (2,479 | ) |
|
| (7,857 | ) |
Total lease cost |
| $ | 6,968 |
|
| $ | 19,547 |
|
Amounts reported in the Condensed Consolidated Balance Sheets for leases where we are the lessee as of September 30, 2019 were as follows:
(Thousands) |
| Location on Condensed Consolidated Balance Sheets |
| September 30, 2019 |
| |
Operating leases |
|
|
|
|
|
|
ROU asset, net |
| Other assets, net |
| $ | 112,579 |
|
ROU liability |
| Accounts payable, accrued expenses and other liabilities, net |
|
| 112,365 |
|
|
|
|
|
|
|
|
Finance leases |
|
|
|
|
|
|
ROU asset, gross |
| Property, plant and equipment, net |
| $ | 129,712 |
|
ROU liability |
| Finance lease obligations |
|
| 55,225 |
|
|
|
|
|
|
|
|
Weighted-average remaining lease term |
|
|
|
|
|
|
Operating leases |
|
|
| 10.4 years |
| |
Finance leases |
|
|
| 14.0 years |
| |
|
|
|
|
|
|
|
Weighted-average discount rate |
|
|
|
|
|
|
Operating leases |
|
|
|
| 9.8 | % |
Finance leases |
|
|
|
| 8.0 | % |
Other information related to leases as of September 30, 2019 are as follows:
(Thousands) |
| Nine Months Ended September 30, 2019 |
| |
Cash paid for amounts included in the measurement of lease liabilities |
|
|
|
|
Operating cash flows from finance leases |
| $ | 3,192 |
|
Operating cash flows from operating leases |
|
| 20,519 |
|
Financing cash flows from finance leases |
|
| 3,179 |
|
|
|
|
|
|
Non-cash items: |
|
|
|
|
New operating leases |
| $ | 23,706 |
|
New finance leases |
|
| 3,240 |
|
21
Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements – Continued
(unaudited)
Future lease payments under non-cancellable leases as of September 30, 2019 are as follows:
(Thousands) |
| Operating Leases |
|
| Finance Leases |
| ||
2019 |
| $ | 6,258 |
|
| $ | 2,099 |
|
2020 |
|
| 24,159 |
|
|
| 7,598 |
|
2021 |
|
| 22,135 |
|
|
| 6,839 |
|
2022 |
|
| 19,650 |
|
|
| 6,708 |
|
2023 |
|
| 17,462 |
|
|
| 6,689 |
|
Thereafter |
|
| 99,334 |
|
|
| 58,162 |
|
Total undiscounted lease payments |
| $ | 188,998 |
|
| $ | 88,095 |
|
Less: imputed interest |
|
| (76,633 | ) |
|
| (32,870 | ) |
Total lease liabilities |
| $ | 112,365 |
|
| $ | 55,225 |
|
|
|
Future minimum rental payments under non-cancellable operating leases as of December 31, 2018(1) were as follows:
(Thousands) |
|
|
|
|
2019 |
| $ | 10,585 |
|
2020 |
|
| 7,543 |
|
2021 |
|
| 4,815 |
|
2022 |
|
| 3,186 |
|
2023 |
|
| 2,382 |
|
Thereafter |
|
| 15,269 |
|
Total |
| $ | 43,780 |
|
(1) Prior period amounts have not been adjusted under the modified retrospective transition approach. |
|
Future minimum rental payments under capital leases in effect as of December 31, 2018(1) were as follows:
(Thousands) |
|
|
|
|
2019 |
| $ | 8,683 |
|
2020 |
|
| 7,357 |
|
2021 |
|
| 6,638 |
|
2022 |
|
| 6,484 |
|
2023 |
|
| 6,457 |
|
Thereafter |
|
| 52,533 |
|
Total minimum payments |
|
| 88,152 |
|
Less amount representing interest |
|
| (32,870 | ) |
Total |
| $ | 55,282 |
|
(1) Prior period amounts have not been adjusted under the modified retrospective transition approach. |
|
Future sublease rentals as of September 30, 2019 are as follows:
(Thousands) |
| Sublease Rentals |
| |
2019 |
| $ | 2,970 |
|
2020 |
|
| 9,431 |
|
2021 |
|
| 9,461 |
|
2022 |
|
| 9,493 |
|
2023 |
|
| 9,570 |
|
Thereafter |
|
| 98,640 |
|
Total |
| $ | 139,565 |
|
22
Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements – Continued
(unaudited)
Note 5. Business Combinations, Asset Acquisitions and Dispositions
2019 Transactions
Bluebird Network, LLC
On July 3, 2017,August 30, 2019, the Company closed on its operating company/property company (“OpCo-PropCo”) transaction with Macquarie Infrastructure Partners (“MIP”) to acquire Bluebird Network, LLC (“Bluebird”). MIP operates within the Macquarie Infrastructure and Real Assets division of Macquarie Group. Bluebird’s network consists of approximately 178,000 fiber strand miles in the Midwest across Missouri, Kansas, Illinois and Oklahoma. In the transaction, Uniti purchased the Bluebird fiber network and MIP purchased the Bluebird operations. In addition, Uniti sold Uniti Fiber’s Midwest operations to MIP, while Uniti retains its existing Midwest fiber network. Uniti acquired the fiber network of Bluebird for $319 million, of which $175 million was funded by Uniti in cash and $144 million from pre-paid rent received from MIP at closing. The pre-paid rent is recorded within Deferred Revenue on our Condensed Consolidated Balance Sheet. In connection with the sale of the Company’s Midwest operations, we received total upfront cash of approximately $37 million, including related pre-paid rent received from MIP at closing. Concurrently with the closing of these transactions, Uniti has leased the Bluebird fiber network and its Midwest fiber network on a combined basis to MIP, under a long-term triple net lease. The lease is reported within the results of our Leasing segment. The Midwest operations that was sold to MIP was previously reported in our Fiber Infrastructure segment.
The acquisition of the Bluebird network was accounted for as an asset acquisition. The following is a summary of the estimated fair values of the assets acquired:
|
| (thousands) |
| |
Property, plant and equipment |
| $ | 141,583 |
|
Right of use asset |
|
| 5,851 |
|
Intangible asset, net |
|
| 171,556 |
|
Total purchase consideration |
| $ | 318,990 |
|
The right of use assets are recorded within Other Assets, net on our Condensed Consolidated Balance Sheets. Of the $171.6 million of intangible assets acquired, $128.1 million is related to rights of way with an indefinite life, while $43.5 million is related to leasehold interests and have a life of 25 years.
Upon the sale of our Midwest operations, we recognized an approximately $2.2 million net loss, which is recorded within Other (Income) Expense on the Condensed Consolidated Statements of Income. This loss included the allocation of approximately $2.2 million of goodwill. See Note 9.
Sale of Ground Lease Portfolio
On May 23, 2019, the Company completed the sale of substantially all of its U.S. ground lease business. During second quarter, we received cash consideration of $30.7 million resulting in a pre-tax gain of $5.0 million. We sold an additional ground lease during the third quarter, receiving cash consideration of $2.9 million.
Sale of Latin American Tower Portfolio
On April 2, 2019, the Company completed the sale of the Uniti Towers’ Latin America business (“LATAM”) to an entity controlled by Phoenix Towers International for cash consideration of $101.6 million resulting in a pre-tax gain of $23.8 million.
JKM Consulting Inc. (M2 Connections)
On March 25, 2019, we acquired 100% of the outstanding equity of Southern LightJKM Consulting Inc. d/b/a M2 Connections (“M2”) for $638.1 million in cash and 2.5 million common units in the Operating Partnership with an acquisition date fair valueconsideration of $64.3$5.5 million. Southern LightM2 is a leadingdark fiber and internet access provider of data transport services along the Gulf Coast region serving twelve attractive Tier II and Tier III markets across Florida, Alabama, Louisiana, and Mississippi.primarily to educational institutions in Alabama. This acquisition strengthens Uniti Fiber’s relationships with new E-Rate customers. The acquisition was recorded by allocating the costs of the assets acquired based on their estimated fair values at the acquisition date. The excess of the cost of the acquisition over the fair value of the assets acquired is recorded as goodwill of $1.7 million within our Fiber Infrastructure segment. See Note 1112. The following is a summary of the estimated fair values of the assets acquired and liabilities assumed:
|
| (thousands) |
| |
Property, plant and equipment |
| $ | 279,467 |
|
Cash and cash equivalents |
|
| 1,992 |
|
Accounts receivable |
|
| 11,139 |
|
Other assets |
|
| 1,287 |
|
Goodwill |
|
| 319,508 |
|
Intangible assets |
|
| 160,100 |
|
Accounts payable, accrued expenses and other liabilities |
|
| (19,846 | ) |
Deferred revenue |
|
| (38,134 | ) |
Deferred income taxes |
|
| (9,892 | ) |
Capital lease obligations |
|
| (3,189 | ) |
Total purchase consideration |
| $ | 702,432 |
|
During the second quarter of 2018, the purchase price allocation was adjusted to record $0.9 million of deferred tax labilities that existed at the date of acquisition.
The goodwill arising from the transaction is primarily attributable to the expansion of our fiber network through the complementary nature of Southern Light’s fiber network to our existing fiber network, including anticipated incremental sales and cost savings. For federal income tax purposes, the transaction was treated as partiallya taxable (for portion paid in cash) and partially non-taxable (for portion paid with common unitsacquisition. Thus, all of the goodwill is expected to be deductible for tax purposes. The financial results of M2 are included in the Operating Partnership). The portion of the acquisition that was treated as a taxable acquisition resulted in tax deductible goodwill. No tax deductible goodwill resultedFiber Infrastructure segment from the portiondate of acquisition and were not
23
Uniti Group Inc.
Notes to the acquisition that was treated as non-taxable.Condensed Consolidated Financial Statements – Continued
As part(unaudited)
material, individually or in the aggregate, to our results of the acquisition, we acquired an intangible asset that was assigned to customer relationships of $160.1 million (15 year life). See Note 8.operations and therefore, pro forma financial information has not been presented.
Hunt Telecommunications, LLC2018 Transactions
Information Transport Solutions, Inc.
On July 3, 2017,October 19, 2018, we acquired 100% of the outstanding equity of HuntInformation Transport Solutions, Inc. (“ITS”) for $129.3 million in cash and 1.6 million common units in the Operating Partnership with an acquisition date fair value of $41.6 million. Additional contingent consideration of up to $17 million, with an acquisition date fair value of $16.4 million, may be paid upon the achievement of certain revenue milestones by delivering shares of our common stock. See Note 5. Hunt$58.3 million. ITS is a leadingfull-service managed services provider of data transporttechnology solutions, primarily to K-12 schoolseducational institutions in Alabama and government agenciesFlorida. This acquisition expands Uniti Fiber’s product offerings and strengthens relationships with a dense fiber network in Louisiana.new and existing E-Rate customers. The acquisition was recorded by allocating the costs of the assets acquired based on their estimated fair values at the acquisition date. The excess of the cost of the acquisition over the fair value of the assets acquired is recorded as goodwill within our Fiber Infrastructure segment. See Note 1112.
17
Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements – Continued
(unaudited)
| (thousands) |
| ||
Property, plant and equipment |
| $ | 59,682 |
|
Cash and cash equivalents |
|
| 3,181 |
|
Accounts receivable |
|
| 4,906 |
|
Other assets |
|
| 413 |
|
Goodwill |
|
| 99,580 |
|
Intangible assets |
|
| 73,000 |
|
Accounts payable, accrued expenses and other liabilities |
|
| (3,741 | ) |
Deferred revenue |
|
| (6,036 | ) |
Deferred income taxes |
|
| (43,550 | ) |
Capital lease obligations |
|
| (164 | ) |
Total purchase consideration |
| $ | 187,271 |
|
During the first quarter of 2018,2019, certain contractual working capital adjustments resulted in a $1.3 million reduction of the purchase price allocation was adjusted to record certain deferred revenues and accruedgoodwill. The following is a summary of the estimated fair values of the assets acquired and liabilities that existed at the date of acquisition. Deferred revenue and accrued liabilities increased $2.2 million and $1.2 million, respectively.assumed:
|
| (thousands) |
| |
Property, plant and equipment |
| $ | 4,270 |
|
Cash and cash equivalents |
|
| 5,931 |
|
Accounts receivable |
|
| 3,909 |
|
Other assets |
|
| 7,238 |
|
Goodwill |
|
| 9,941 |
|
Intangible assets |
|
| 30,254 |
|
Accounts payable, accrued expenses and other liabilities |
|
| (2,645 | ) |
Deferred revenue |
|
| (567 | ) |
Total purchase consideration |
| $ | 58,331 |
|
During the second quarter of 2018, the purchase price allocation was adjusted to record $3.2 million of deferred tax labilities that existed at the date of acquisition.
The goodwill arising from the transaction is primarily attributable to strategic opportunities that arose from the expansionacquisition of our fiber network through the complementary nature of Hunt’s fiber network to ourITS, including strengthening relationships with new and existing fiber network, includingE-Rate customers and anticipated incremental sales and cost savings. TheFor federal income tax purposes, the transaction was treated as a taxable acquisition. Thus, all of the goodwill is not expected to be deductible for tax purposes.
As part of the acquisition weWe acquired an intangible asset that was assigned to customer relationships of $73$30.3 million (18(14 year life). See Note 8.The Company determined the useful life for the customer relationship by applying an income approach (using the multi-period excess earnings method with a discount rate commensurate to the risk of the asset) and resulted from two key considerations: attrition rate and cumulative present value of cash flows, including assessing the period over which the asset is expected to contribute to the Company’s future cash flows.
Note 5.6. 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 datedate;
Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectlyindirectly; and
Level 3 – Unobservable inputs for the asset or liabilityliability.
Our financial instruments consist of cash and cash equivalents, accounts and other receivables, a derivative asset and liability, our outstanding notes and other debt, contingent consideration and accounts, interest and dividends payable.
The following table summarizes the fair value of our financial instruments at September 30, 2018 and December 31, 2017:
1824
Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements – Continued
(unaudited)
The following table summarizes the fair value of our financial instruments at September 30, 2019 and December 31, 2018:
| Total |
| Quoted Prices in Active Markets (Level 1) |
| Prices with Other Observable Inputs (Level 2) |
| Prices with Unobservable Inputs (Level 3) |
|
| Total |
| Quoted Prices in Active Markets (Level 1) |
| Prices with Other Observable Inputs (Level 2) |
| Prices with Unobservable Inputs (Level 3) |
| |||||||||
At September 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Assets |
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Derivative asset |
| $ | 64,410 |
| $ | - |
| $ | 64,410 |
| $ | - |
| |||||||||||||
Total |
| $ | 64,410 |
| $ | - |
| $ | 64,410 |
| $ | - |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
At September 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Senior secured term loan B - variable rate, due October 24, 2022 |
| $ | 1,977,879 |
| $ | - |
| $ | 1,977,879 |
| $ | - |
|
| $ | 1,998,748 |
| $ | - |
| $ | 1,998,748 |
| $ | - |
|
Senior secured notes - 6.00%, due April 15, 2023 |
|
| 536,250 |
| - |
| 536,250 |
| - |
|
|
| 532,125 |
| - |
| 532,125 |
| - |
| ||||||
Senior unsecured notes - 8.25%, due October 15, 2023 |
|
| 1,068,375 |
| - |
| 1,068,375 |
| - |
|
|
| 999,000 |
| - |
| 999,000 |
| - |
| ||||||
Senior unsecured notes - 7.125%, due December 15, 2024 |
|
| 550,500 |
| - |
| 550,500 |
| - |
|
|
| 520,500 |
| - |
| 520,500 |
| - |
| ||||||
Senior secured revolving credit facility, variable rate, due April 24, 2020 |
|
| 539,946 |
| - |
| 539,946 |
| - |
| ||||||||||||||||
Exchangeable senior notes - 4.00%, due June 15, 2024 |
|
| 303,169 |
| - |
| 303,169 |
| - |
| ||||||||||||||||
Senior secured revolving credit facility, variable rate, due April 24, 2022 |
|
| 574,961 |
| - |
| 574,961 |
| - |
| ||||||||||||||||
Derivative liability |
|
| 27,761 |
|
|
| 27,761 |
|
|
| ||||||||||||||||
Contingent consideration |
|
| 86,435 |
|
| - |
|
| - |
|
| 86,435 |
|
|
| 11,440 |
|
| - |
|
| - |
|
| 11,440 |
|
Total |
| $ | 4,759,385 |
| $ | - |
| $ | 4,672,950 |
| $ | 86,435 |
|
| $ | 4,967,704 |
| $ | - |
| $ | 4,956,264 |
| $ | 11,440 |
|
(Thousands) |
| Total |
| Quoted Prices in Active Markets (Level 1) |
| Prices with Other Observable Inputs (Level 2) |
| Prices with Unobservable Inputs (Level 3) |
|
| Total |
| Quoted Prices in Active Markets (Level 1) |
| Prices with Other Observable Inputs (Level 2) |
| Prices with Unobservable Inputs (Level 3) |
| ||||||||
At December 31, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
At December 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Derivative asset |
| $ | 6,793 |
| $ | - |
| $ | 6,793 |
| $ | - |
|
| $ | 31,043 |
| $ | - |
| $ | 31,043 |
| $ | - |
|
Total |
| $ | 6,793 |
| $ | - |
| $ | 6,793 |
| $ | - |
|
| $ | 31,043 |
| $ | - |
| $ | 31,043 |
| $ | - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Senior secured term loan B - variable rate, due October 24, 2022 |
| $ | 2,011,237 |
| $ | - |
| $ | 2,011,237 |
| $ | - |
|
| $ | 1,877,303 |
| $ | - |
| $ | 1,877,303 |
| $ | - |
|
Senior secured notes - 6.00%, due April 15, 2023 |
|
| 540,375 |
| - |
| 540,375 |
| - |
|
|
| 504,625 |
| - |
| 504,625 |
| - |
| ||||||
Senior unsecured notes - 8.25%, due October 15, 2023 |
|
| 1,073,925 |
| - |
| 1,073,925 |
| - |
|
|
| 965,700 |
| - |
| 965,700 |
| - |
| ||||||
Senior unsecured notes - 7.125%, due December 15, 2024 |
|
| 542,250 |
| - |
| 542,250 |
| - |
|
|
| 496,500 |
| - |
| 496,500 |
| - |
| ||||||
Senior secured revolving credit facility, variable rate, due April 24, 2020 |
|
| 279,972 |
| - |
| 279,972 |
| - |
|
|
| 639,936 |
| - |
| 639,936 |
| - |
| ||||||
Contingent consideration |
|
| 105,762 |
|
| - |
|
| - |
|
| 105,762 |
|
|
| 83,401 |
|
| - |
|
| - |
|
| 83,401 |
|
Total |
| $ | 4,553,521 |
| $ | - |
| $ | 4,447,759 |
| $ | 105,762 |
|
| $ | 4,567,465 |
| $ | - |
| $ | 4,484,064 |
| $ | 83,401 |
|
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 $4.87$5.23 billion at September 30, 2018,2019, with a fair value of $4.67$4.97 billion. The estimated fair value of our outstanding notes and other debt was based on available external pricing data and current market rates for similar debt instruments, among other factors, which are classified as Level 2 inputs within the fair value hierarchy. Derivative assets and liabilities are carried at fair value. See Note 78. The fair value of an interest rate swap is determined based on the present value of expected future cash flows using observable, quoted LIBOR swap rates for the full term of the swap and also incorporate credit valuation adjustments to appropriately reflect both Uniti’s own non-performance risk and non-performance risk of the respective counterparties. The Company has determined that the majority of the inputs used to value its derivative assets and liabilities fall within Level 2 of the fair value hierarchy; however, the associated credit valuation adjustments utilized Level 3 inputs, such as estimates of credit spreads, to evaluate the likelihood of default by the Company and its counterparties. As of September 30, 2018,2019, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its
1925
Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements – Continued
(unaudited)
assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustment is not significant to the overall value of the derivatives. As such, the Company classifies its derivative assets and liabilities valuation in Level 2 of the fair value hierarchy.
As partGiven the limited trade activity of the Exchangeable Notes, the fair value of the Exchangeable Notes (see Note 10) is determined based on inputs that are observable in the market and have been classified as Level 2 in the fair value hierarchy. Specifically, we estimated the fair value of the Exchangeable Notes based on readily available external pricing information, quoted market prices, and current market rates for similar convertible debt instruments.
The merger agreement related to the July 3, 2017 acquisition of Hunt on July 3, 2017, we may be obligated to payTelecommunications, LLC (“Hunt”) contained a contingent consideration arrangement (the “Hunt Contingent Consideration”) upon the achievement of certain defined revenue milestones; therefore, we have recorded the estimated fair value of contingent consideration of approximately $13.0 million as of September 30, 2018. See Note 4. In accordance with the Hunt merger agreement, Uniti common shares will be used to satisfy the contingent consideration payment.milestones. The fair value of the Hunt Contingent Consideration at September 30, 2018 was determined using the closing price of our common shares in the active market and the probability of expected declared dividends and is classified as Level 3. On January 4, 2019, in accordance with the merger agreement, we settled the Hunt Contingent Consideration in full satisfaction of the obligation through the issuance of 645,385 common shares having a fair value of $11.2 million.
We acquired Tower Cloud, Inc. (“Tower Cloud”) on August 31, 2016. As part of the acquisition of Tower Cloud on August 31, 2016,acquisition, we may be obligated to pay contingent consideration upon achievement of certain defined operational and financial milestones. At the Company’s discretion, a combination of cash and Uniti common shares may be used to satisfy the contingent consideration payments, provided that at least 50% of the aggregate amount of payments is satisfied in cash. We recorded the estimated fair value of future contingent consideration of $73.4$11.4 million as of September 30, 2018.2019. The fair value of the contingent consideration as of September 30, 2018,2019, was determined using a discounted cash flow model and probability adjusted estimates of the future operational milestones and is classified as Level 3. During the nine months ended September 30, 20182019 and 2017,2018, we paid $18.6$32.2 million and $20.0$18.6 million, respectively, for the achievement of certain milestones in accordance with the Tower Cloud merger agreement.
Changes in the fair value of contingent consideration arrangements are recorded in our Condensed Consolidated Statement of Income in the period in which the change occurs. For the three and nine months ended September 30, 2018,2019, there was a $0.2$3.0 million decrease and $0.7$28.5 million, respectively, decrease respectively, in the fair value of the contingent consideration that was recorded in Other (income) expense on the Condensed Consolidated Statements of Income.
The following is a roll forward of our liabilities measured at fair value on a recurring basis using unobservable inputs (Level 3):
(Thousands) |
| December 31, 2017 |
|
| Transfers into Level 3 |
|
| (Gain)/Loss included in earnings |
|
| Settlements |
|
| September 30, 2018 |
|
| December 31, 2018 |
|
| Transfers into Level 3 |
|
| (Gain)/Loss included in earnings |
|
| Settlements |
|
| September 30, 2019 |
| ||||||||||
Contingent consideration |
| $ | 105,762 |
|
| $ | - |
|
| $ | (687 | ) |
| $ | (18,640 | ) |
| $ | 86,435 |
|
| $ | 83,401 |
|
| $ | - |
|
| $ | (28,530 | ) |
| $ | (43,431 | ) |
| $ | 11,440 |
|
26
Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements – Continued
(unaudited)
Note 6.7. Property, Plant and Equipment
The carrying value of property, plant and equipment is as follows:
(Thousands) |
| Depreciable Lives |
|
| September 30, 2018 |
|
| December 31, 2017 |
|
| Depreciable Lives |
|
| September 30, 2019 |
|
| December 31, 2018 |
| ||||||
Land |
| Indefinite |
|
| $ | 27,025 |
|
| $ | 27,110 |
|
| Indefinite |
|
| $ | 28,287 |
|
| $ | 29,304 |
| ||
Building and improvements |
| 3 - 40 years |
|
|
| 336,106 |
|
|
| 333,121 |
|
| 3 - 40 years |
|
|
| 354,726 |
|
|
| 340,238 |
| ||
Real property interests |
|
| (1 | ) |
|
| 34,618 |
|
|
| 34,580 |
|
|
| (1 | ) |
|
| 3,285 |
|
|
| 34,878 |
|
Poles |
| 30 years |
|
|
| 247,956 |
|
|
| 243,710 |
|
| 30 years |
|
|
| 257,116 |
|
|
| 248,989 |
| ||
Fiber |
| 30 years |
|
|
| 2,917,678 |
|
|
| 2,671,216 |
|
| 30 years |
|
|
| 3,364,288 |
|
|
| 3,005,304 |
| ||
Equipment |
| 5 - 7 years |
|
|
| 237,309 |
|
|
| 201,490 |
|
| 5 - 7 years |
|
|
| 280,781 |
|
|
| 256,838 |
| ||
Copper |
| 20 years |
|
|
| 3,710,321 |
|
|
| 3,656,384 |
|
| 20 years |
|
|
| 3,774,931 |
|
|
| 3,721,649 |
| ||
Conduit |
| 30 years |
|
|
| 89,692 |
|
|
| 91,210 |
|
| 30 years |
|
|
| 89,770 |
|
|
| 89,692 |
| ||
Tower assets |
| 20 years |
|
|
| 100,668 |
|
|
| 59,610 |
|
| 20 years |
|
|
| 148,034 |
|
|
| 120,073 |
| ||
Capital lease assets |
|
| (1 | ) |
|
| 122,281 |
|
|
| 93,465 |
|
|
| (1 | ) |
|
| 129,712 |
|
|
| 123,017 |
|
Other assets |
| 15 - 20 years |
|
|
| 10,628 |
|
|
| 10,232 |
|
| 15 - 20 years |
|
|
| 12,303 |
|
|
| 11,524 |
| ||
Corporate assets |
| 3 - 7 years |
|
|
| 3,870 |
|
|
| 7,970 |
|
| 3 - 7 years |
|
|
| 5,014 |
|
|
| 4,214 |
| ||
Construction in progress |
|
| (1 | ) |
|
| 124,014 |
|
|
| 112,489 |
|
|
| (1 | ) |
|
| 111,115 |
|
|
| 137,585 |
|
|
|
|
|
|
|
| 7,962,166 |
|
|
| 7,542,587 |
|
|
|
|
|
|
| 8,559,362 |
|
|
| 8,123,305 |
|
Less accumulated depreciation |
|
|
|
|
|
| (4,806,960 | ) |
|
| (4,488,698 | ) |
|
|
|
|
|
| (5,188,211 | ) |
|
| (4,914,299 | ) |
Net property, plant and equipment |
|
|
|
|
| $ | 3,155,206 |
|
| $ | 3,053,889 |
|
|
|
|
|
| $ | 3,371,151 |
|
| $ | 3,209,006 |
|
(1) See our Annual Report for property, plant and equipment accounting policies. | (1) See our Annual Report for property, plant and equipment accounting policies. |
| (1) See our Annual Report for property, plant and equipment accounting policies. |
|
20
Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements – Continued
(unaudited)
Depreciation expense for the three and nine months ended September 30, 20182019 was $106.5$94.9 million and $323.4$288.9 million, respectively.
Depreciation expense for the three and nine months ended September 30, 20172018 was $107.1$106.5 million and $305.8$323.4 million, respectively.
Note 7.8. Derivative Instruments and Hedging Activities
The Company uses derivative instruments to mitigate the effects of interest rate volatility inherent in our variable rate debt, which could unfavorably impact our future earnings and forecasted cash flows. The Company does not use derivative instruments for speculative or trading purposes.
On April 27, 2015, we entered into fixed for floating interest rate swap agreements to mitigate the interest rate risk inherent in our variable rate Senior Secured Term Loan B facility. These interest rate swaps are designated as cash flow hedges and have a notional value of $2.07$2.05 billion and mature on October 24, 2022. The weighted average fixed rate paid is 2.105%, and the variable rate received resets monthly to the one-month LIBOR subject to a minimum rate of 1.0%. The Company does not currently have any master netting arrangements related to its derivative contracts.
The following table summarizes the fair value and the presentation in our Condensed Consolidated Balance Sheet:Sheets:
(Thousands) |
| Location on Condensed Consolidated Balance Sheet |
| September 30, 2018 |
|
| December 31, 2017 |
|
| Location on Condensed Consolidated Balance Sheets |
| September 30, 2019 |
|
| December 31, 2018 |
| ||||
Interest rate swaps |
| Derivative asset |
| $ | 64,410 |
|
| $ | 6,793 |
|
| Derivative asset |
| $ | - |
|
| $ | 31,043 |
|
Interest rate swaps |
| Derivative liability |
| $ | 27,761 |
|
| $ | - |
|
As of September 30, 20182019, all of the interest rate swaps were valued in net unrealized loss positions and recognized as liability balances within the derivative liability balance. As of December 31, 2017,2018, all of the interest rate swaps were valued in net unrealized gain positions and recognized as asset balances within the derivative asset balance. For the three and nine months ended September 30, 2019, the amount recorded in other comprehensive income related to the unrealized loss on derivative instruments was $7.9 million and $54.0 million, respectively. For the three and nine months ended September 30, 2018, the amount recorded in other comprehensive income related to the unrealized gain on derivative instruments was $7.6 million and $54.0 million, respectively. For the three and nine months ended September 30, 2017, the amount recorded in other comprehensive income related to the unrealized loss on derivative instruments was $2.9 million and $20.6 million, respectively. The amount reclassified out of other comprehensive income into interest expense on our Condensed Consolidated Statement of Income for the three and nine months ended September 30, 2018,2019, was $0.1a benefit of $0.7 million and $3.7$4.7 million, respectively. The amount reclassified out of other comprehensive income into interest expense on our Condensed Consolidated Statement of Income for the
27
Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements – Continued
(unaudited)
three and nine months ended September 30, 2017,2018, was $4.7$0.1 million and $16.3$3.7 million, respectively. For the three and nine months ended September 30, 20182019 and 2017,2018, there was no0 ineffective portion of the change in fair value derivatives.
Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on our variable-rate debt. During the next twelve months, beginning October 1, 2018,2019, we estimate that $0.4$3.0 million will be reclassified as an increasea benefit to interest expense.
Exchangeable Notes Hedge Transactions
On June 25, 2019, concurrently with the pricing of the Exchangeable Notes (see Note 10), and on June 27, 2019, concurrently with the exercise by the Initial Purchasers (as defined below) of their option to purchase additional Exchangeable Notes, Uniti Fiber, the issuer of the Exchangeable Notes, entered into the Note Hedge Transactions with certain of 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 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. Uniti Fiber 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 Condensed Consolidated Balance Sheets, 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 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 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 Condensed Consolidated Balance Sheets, are not accounted for as derivatives that are remeasured each reporting period.
28
Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements – Continued
(unaudited)
Note 8.9. Goodwill and Intangible Assets and Liabilities
Changes in the carrying amount of goodwill occurring during the nine months ended September 30, 2018,2019, are as follows:
(Thousands) |
| Fiber Infrastructure |
|
| Total |
| ||
Goodwill at December 31, 2017 |
| $ | 673,729 |
|
| $ | 673,729 |
|
Goodwill purchase accounting adjustments - See Note 4 |
|
| 7,446 |
|
|
| 7,446 |
|
Goodwill associated with 2018 acquisitions |
|
| - |
|
|
| - |
|
Goodwill at September 30, 2018 |
|
| 681,175 |
|
|
| 681,175 |
|
(Thousands) |
| Fiber Infrastructure |
|
| Total |
| ||
Goodwill at December 31, 2018 |
| $ | 692,385 |
|
| $ | 692,385 |
|
Goodwill purchase accounting adjustments - See Note 5 |
|
| (1,269 | ) |
|
| (1,269 | ) |
Goodwill associated with 2019 acquisitions and dispositions, net |
|
| (444 | ) |
|
| (444 | ) |
Goodwill at September 30, 2019 |
|
| 690,672 |
|
|
| 690,672 |
|
21
TableIn connection with the sale of Contents
our Uniti Group Inc.
NotesFiber Midwest operations to MIP in the third quarter of 2019 (See Note 5), we allocated approximately $2.2 million of goodwill to the Condensed Consolidated Financial Statementscarrying value of the business being sold. This allocation was done using the relative fair value approach as prescribed by ASC 350, Intangibles – Continued
(unaudited)
Goodwill and Other.
The carrying value of the intangible assets is as follows:
(Thousands) |
| September 30, 2018 |
|
| December 31, 2017 |
|
| September 30, 2019 |
|
| December 31, 2018 |
| ||||||||||||||||||||||||||||||||||||
|
| Original Cost |
|
| Cumulative Translation Adjustment |
|
| Accumulated Amortization |
|
| Original Cost |
|
| Cumulative Translation Adjustment |
|
| Accumulated Amortization |
|
| Original Cost |
|
| Cumulative Translation Adjustment |
|
| Accumulated Amortization |
|
| Original Cost |
|
| Cumulative Translation Adjustment |
|
| Accumulated Amortization |
| ||||||||||||
Indefinite life intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade name |
| $ | 2,000 |
|
| $ | - |
|
| $ | - |
|
| $ | 2,000 |
|
| $ | - |
|
| $ | - |
|
| $ | 2,000 |
|
| $ | - |
|
| $ | - |
|
| $ | 2,000 |
|
| $ | - |
|
| $ | - |
|
Rights of Way |
|
| 128,027 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
| ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finite life intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer lists |
|
| 421,743 |
|
|
| - |
|
|
| (63,318 | ) |
|
| 421,743 |
|
|
| - |
|
|
| (46,049 | ) |
|
| 450,597 |
|
|
| - |
|
|
| (87,500 | ) |
|
| 451,997 |
|
|
| - |
|
|
| (69,393 | ) |
Tenant contracts |
|
| 37,386 |
|
|
| 2,146 |
|
|
| (2,995 | ) |
|
| 37,386 |
|
|
| 1,141 |
|
|
| (1,605 | ) | ||||||||||||||||||||||||
Network(1) |
|
| 13,541 |
|
|
| 773 |
|
|
| (1,084 | ) |
|
| 13,541 |
|
|
| 410 |
|
|
| (581 | ) | ||||||||||||||||||||||||
Acquired below-market leases |
|
| 1,509 |
|
|
| - |
|
|
| (252 | ) |
|
| 1,509 |
|
|
| - |
|
|
| (138 | ) | ||||||||||||||||||||||||
Leasehold Interest |
|
| 43,530 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
| ||||||||||||||||||||||||
Tenant contracts(3) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 37,386 |
|
|
| 411 |
|
|
| (3,293 | ) | ||||||||||||||||||||||||
Network(1)(3) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 13,541 |
|
|
| 144 |
|
|
| (1,192 | ) | ||||||||||||||||||||||||
Acquired below-market leases(3) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1,509 |
|
|
| - |
|
|
| (289 | ) | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
| 479,098 |
|
|
|
|
|
|
|
|
|
|
| 477,730 |
|
|
|
|
|
|
|
|
|
| $ | 624,154 |
|
|
|
|
|
|
|
|
|
|
| 506,988 |
|
|
|
|
|
|
|
|
|
Less: Accumulated amortization |
|
| (67,649 | ) |
|
|
|
|
|
|
|
|
|
| (48,373 | ) |
|
|
|
|
|
|
|
|
|
| (87,500 | ) |
|
|
|
|
|
|
|
|
|
| (74,167 | ) |
|
|
|
|
|
|
|
|
Total intangible assets, net |
| $ | 411,449 |
|
|
|
|
|
|
|
|
|
| $ | 429,357 |
|
|
|
|
|
|
|
|
|
| $ | 536,654 |
|
|
|
|
|
|
|
|
|
| $ | 432,821 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finite life intangible liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired above-market leases |
| $ | 3,440 |
|
| $ | 83 |
|
| $ | (587 | ) |
| $ | 3,440 |
|
| $ | 15 |
|
| $ | (317 | ) | ||||||||||||||||||||||||
Acquired above-market leases(3) |
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | 3,440 |
|
| $ | (182 | ) |
| $ | (624 | ) | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finite life intangible liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
Acquired above-market leases |
|
| 3,523 |
|
|
|
|
|
|
|
|
|
|
| 3,455 |
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
Total intangible liabilities |
|
| - |
|
|
|
|
|
|
|
|
|
|
| 3,258 |
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
Less: Accumulated amortization |
|
| (587 | ) |
|
|
|
|
|
|
|
|
|
| (317 | ) |
|
|
|
|
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
| (624 | ) |
|
|
|
|
|
|
|
|
Total intangible liabilities, net(2) |
| $ | 2,936 |
|
|
|
|
|
|
|
|
|
| $ | 3,138 |
|
|
|
|
|
|
|
|
|
| $ | - |
|
|
|
|
|
|
|
|
|
| $ | 2,634 |
|
|
|
|
|
|
|
|
|
(1) | Reflects the potential to lease additional tower capacity on the existing towers due to their geographical location and capacity that currently exists on these towers as of the valuation date. |
(2) | Recorded in accounts payable, accrued expenses and other liabilities on the Condensed Consolidated Balance Sheet. |
(3) | Uniti Towers’ Latin American intangible assets were sold on April 2, 2019. See Note 5. |
As of September 30, 2019, the remaining weighted average amortization period of the Company’s intangible assets was 18.3 years. Amortization expense for the three and nine months ended September 30, 2018 was2019 was $6.3 million and $19.0$18.6 million, respectively. Amortization expense for the three and nine months ended September 30, 2017 was2018 was $6.3 million and $11.6$19.0 million, respectively.
29
Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements – Continued
(unaudited)
Amortization expense is estimated to be $25.2$26.0 million for the full year of 2018, $24.5 million in 2019, $23.9$25.5 million in 2020, $23.5$24.7 million in 2021, $24.6 million in 2022, and $23.0$24.6 million for 2022.2023.
Note 9.10. Notes and Other Debt
All debt, including the senior secured credit facility and notes described below, are obligations of the Operating Partnership andand/or certain of its subsidiaries as discussed below. The Company is, however, a guarantor of such debt.
Notes and other debt is as follows:
(Thousands) |
| September 30, 2018 |
|
| December 31, 2017 |
|
| September 30, 2019 |
|
| December 31, 2018 |
| ||||
Principal amount |
| $ | 4,871,077 |
|
| $ | 4,626,887 |
|
| $ | 5,230,017 |
|
| $ | 4,965,808 |
|
Less unamortized discount, premium and debt issuance costs |
|
| (125,850 | ) |
|
| (144,190 | ) |
|
| (219,730 | ) |
|
| (119,575 | ) |
Notes and other debt less unamortized discount, premium and debt issuance costs |
| $ | 4,745,227 |
|
| $ | 4,482,697 |
|
| $ | 5,010,287 |
|
| $ | 4,846,233 |
|
22
Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements – Continued
(unaudited)
Notes and other debt at September 30, 20182019 and December 31, 20172018 consisted of the following:
|
| September 30, 2018 |
|
| December 31, 2017 |
|
| September 30, 2019 |
|
| December 31, 2018 |
| ||||||||||||||||||||
(Thousands) |
| Principal |
|
| Unamortized Discount, Premium and Debt Issuance Costs |
|
| Principal |
|
| Unamortized Discount, Premium and Debt Issuance Costs |
|
| Principal |
|
| Unamortized Discount, Premium and Debt Issuance Costs |
|
| Principal |
|
| Unamortized Discount, Premium and Debt Issuance Costs |
| ||||||||
Senior secured term loan B - variable rate, due October 24, 2022 (discount is based on imputed interest rate of 5.66%) |
| $ | 2,071,077 |
|
|
| (74,597 | ) |
| $ | 2,086,887 |
|
| $ | (87,140 | ) | ||||||||||||||||
Senior secured term loan B - variable rate, due October 24, 2022 (discount is based on imputed interest rate of 7.45%) |
| $ | 2,049,998 |
|
|
| (80,528 | ) |
| $ | 2,065,808 |
|
| $ | (70,337 | ) | ||||||||||||||||
Senior secured notes - 6.00%, due April 15, 2023 (discount is based on imputed interest rate of 6.29%) |
|
| 550,000 |
|
|
| (7,472 | ) |
|
| 550,000 |
|
|
| (8,508 | ) |
|
| 550,000 |
|
|
| (6,013 | ) |
|
| 550,000 |
|
|
| (7,116 | ) |
Senior unsecured notes - 8.25%, due October 15, 2023 (discount is based on imputed interest rate of 9.06%) |
|
| 1,110,000 |
|
|
| (36,340 | ) |
|
| 1,110,000 |
|
|
| (40,467 | ) |
|
| 1,110,000 |
|
|
| (30,383 | ) |
|
| 1,110,000 |
|
|
| (34,900 | ) |
Senior unsecured notes - 7.125% due December 15, 2024 |
|
| 600,000 |
|
|
| (7,441 | ) |
|
| 600,000 |
|
|
| (8,075 | ) |
|
| 600,000 |
|
|
| (6,540 | ) |
|
| 600,000 |
|
|
| (7,222 | ) |
Senior secured revolving credit facility, variable rate, due April 24, 2020 |
|
| 540,000 |
|
|
| - |
|
|
| 280,000 |
|
|
| - |
| ||||||||||||||||
Senior unsecured notes - 4.00%, due June 15, 2024 (discount is based on imputed interest rate of 11.1%) |
|
| 345,000 |
|
|
| (88,957 | ) |
|
| - |
|
|
| - |
| ||||||||||||||||
Senior secured revolving credit facility, variable rate, due April 24, 2022 |
|
| 575,019 |
|
|
| (7,310 | ) |
|
| 640,000 |
|
|
| - |
| ||||||||||||||||
Total |
| $ | 4,871,077 |
|
| $ | (125,850 | ) |
| $ | 4,626,887 |
|
| $ | (144,190 | ) |
| $ | 5,230,017 |
|
| $ | (219,730 | ) |
| $ | 4,965,808 |
|
| $ | (119,575 | ) |
At September 30, 2018,2019, notes and other debt included the following: (i) $2.1$2.05 billion under the senior secured term loanSenior Secured Term Loan B facility that matures on October 24, 2022 (“Term Loan Facility”) pursuant to the credit agreement by and among the Operating Partnership, CSL Capital, LLC and Uniti Group Finance Inc., the guarantors and lenders party thereto and Bank of America, N.A., as administrative agent and collateral agent (the “Credit Agreement”); (ii) $550.0 million aggregate principal amount of 6.00% Senior Secured Notes due April 15, 2023 (the “Secured Notes”); (iii) $1.11 billion aggregate principal amount of 8.25% Senior Notes due October 15, 2023 (the “2023 Notes”); (iv) $600 million aggregate principal amount of 7.125% Senior Unsecured Notes due December 15, 2024 (the “2024 Notes,” and together with the Secured Notes and 2023 Notes, the “Notes”),; (v) $345 million aggregate principal amount of 4.00% Exchangeable Senior Notes due June 15, 2024 (the “Exchangeable Notes”) and (v) $540(vi) $575 million under the senior secured revolving credit facility, variable rate, that matures April 24, 20202022 pursuant to the Credit Agreement (the “Revolving Credit Facility” and, together with the Term Loan Facility, the “Facilities”).
On May 9, 2017, the Company completed its previously announced reorganization (the “up-REIT Reorganization”) to operate through a customary “up-REIT” structure. Under this structure, the Operating Partnership now holds substantially all of the Company’s assets and is the parent company of, among others, CSL Capital, LLC, Uniti Group Finance Inc. and Uniti Fiber Holdings Inc. In connection with the up-REIT Reorganization, the Operating Partnership replaced the Company and assumed its obligations as an obligor under the Notes and Facilities. The Company subsequently became a guarantor of the Notes and Facilities. Because the Operating Partnership is not a corporation, a corporate co-obligor that is a subsidiary of the Operating Partnership was also added to the Notes and Credit Agreement as part of the up-REIT Reorganization. As discussed below, Uniti Group Finance Inc. is the corporate co-obligor under the Credit Agreement and co-issuer of the Secured Notes and the 2023 Notes, and Uniti Fiber Holdings Inc. is the co-issuer of the 2024 Notes. Separate financial statements of the Operating Partnership have not been included since the Operating Partnership is not a registrant.
Credit Agreement
The Operating Partnership and its wholly-ownedwholly owned subsidiaries, CSL Capital, LLC and Uniti Group Finance Inc. (collectively, the “Borrowers”) are party to the Credit Agreement, which provides for the Term Loan Facility (in an initial principal amount of $2.14 billion) and the Revolving Credit Facility. The term loans bear interest at a rate equal to LIBOR, subject to a 1.0% floor, plus an applicable margin equal to 3.00%,5.00% and are subject to amortization of 1.0% per annum. All obligations under the Credit Agreement are
30
Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements – Continued
(unaudited)
guaranteed by (i) the Company and (ii) certain of the Operating Partnership’s wholly-ownedwholly owned subsidiaries (the “Subsidiary Guarantors”), and are secured by substantially all of the assets of the Borrowers and the Subsidiary Guarantors, which assets also secure the Secured Notes. The Revolving Credit Facility bearsinitially bore interest at a rate equal to LIBOR plus 1.75% to 2.25% based on our consolidated secured leverage ratio, as defined in the Credit Agreement. On April 28, 2017, we amendedAgreement subject to changes resulting from the Credit Agreement to increase the commitments under our Revolving Credit Facility from $500 million to $750 million. Other terms of the Revolving Credit Facility remain unchanged.Fifth Amendment discussed below.
23
Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements – Continued
(unaudited)
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 (i) incremental term loan borrowings and/or increased commitments under the Credit Agreement in an unlimited amount, so long as, on a pro forma basis after giving effect to any such borrowings or increases, our consolidated secured leverage ratio, as defined in the Credit Agreement, does not exceed 4.00 to 1.00 and (ii) 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 September 30, 2018,2019, the Borrowers were in compliance with all of the covenants under the Credit Agreement.
On March 18, 2019, we received a limited waiver from our lenders under our Credit Agreement, waiving an event of default related solely to the receipt of a going concern opinion from our auditors for our 2018 audited financial statements. The limited waiver was issued in connection with the fourth amendment (the “Fourth Amendment”) to our Credit Agreement. During the pendency of Windstream’s bankruptcy, or at such earlier time when certain other conditions are specified, the Fourth Amendment generally limits our ability under the Credit Agreement to (i) prepay unsecured indebtedness and (ii) pay cash dividends in excess of 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gains. The Fourth Amendment also increased the interest rate on our Term Loan Facility, which now bears a rate of LIBOR, subject to a 1.0% floor, plus an applicable margin equal to 5.0%, a 200 basis point increase over our previous rate. This increase will remain in effect through the remaining term of the facility, which matures on October 24, 2022. The limited waiver would not apply to any going concern opinion we might receive from our auditors for our 2019 audited financial statements. If we conclude that we have substantial doubt as to our ability to continue as a going concern at such time, whether as a result of continued uncertainty around Windstream’s future and the status of our Master Lease or otherwise, we would be in default under our Credit Agreement absent a new waiver or consent. We can provide no assurances as to whether we would be able to obtain a waiver or the terms thereof.
A termination of the Master Lease would result in an “event of default” under the Credit Agreement if a replacement lease was 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.
On June 24, 2019, we entered into an amendment (the “Fifth Amendment”) to our Credit Agreement to extend the maturity date of $575.9 million of commitments under the Revolving Credit Facility to April 24, 2022 and to pay down approximately $101.6 million of outstanding revolving loans and terminate the related commitments. The maturity date of approximately $72.4 million of other commitments was not extended. On June 28, 2019, the Company repaid approximately $174.0 million in total borrowings, which consisted of the $101.6 million required repayment pursuant to the Fifth Amendment and $72.4 million of non-extended borrowings, thereby terminating the non-extended commitments. As a result, all remaining $575.9 million of commitments will terminate on April 24, 2022, at which time all outstanding borrowings must be repaid. The Company used a portion of the net proceeds from the offering of Exchangeable Notes described below to fund the repayments. The Fifth Amendment increased the applicable margin for base rate loans under the Revolving Credit Facility to a range of 2.75% to 3.25% and for Eurodollar rate loans under the Revolving Credit Facility to a range of 3.75% to 4.25%, calculated in a customary manner and determined based on our consolidated secured leverage ratio.
The Notes
31
Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements – Continued
(unaudited)
The Borrowers, as co-issuers, have outstanding $550 million aggregate principal amount of the Secured Notes, of which $400 million was originally issued on April 24, 2015 at an issue price of 100% of par value and the remaining $150 million was issued on June 9, 2016 at an issue price of 99.25% of the par value as an add-on to the existing Secured Notes. The Borrowers, as co-issuers, also have outstanding $1.11 billion aggregate principal amount of the 2023 Notes that were originally issued on April 24, 2015 at an issue price of 97.055% of par value. The Secured Notes and the 2023 Notes are guaranteed by the Company and the Subsidiary Guarantors.
The Operating Partnership and its wholly-wholly owned subsidiaries, CSL Capital, LLC and Uniti Fiber Holdings Inc., as co-issuers, have outstanding $600 million aggregate principal amount of the 2024 Notes, of which $400 million was originally issued on December 15, 2016 at an issue price of 100% of par value and the remaining $200 million of which was issued on May 8, 2017 at an issue price of 100.50% of par value under a separate indenture and was mandatorily exchanged on August 11, 2017 for 2024 Notes issued as “additional notes” under the indenture governing the 2024 Notes. The 2024 Notes are guaranteed by the Company, Uniti Group Finance Inc. and the Subsidiary Guarantors.
Effective July 8, 2019, Deutsche Bank Trust Company Americas succeeded as trustee and collateral agent, as applicable, to the Notes pursuant to a Tri-Party Agreement dated as of June 26, 2019 among Deutsche Bank Trust Company, Wells Fargo Bank, N.A. and the co-issuers of the Notes.
The Exchangeable Notes
On June 28, 2019, Uniti Fiber, 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) 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’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 issued the Exchangeable Notes pursuant to an indenture, dated as of June 28, 2019 (the “Indenture”), among Uniti Fiber, 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’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’s delivery of a notice of redemption, Uniti Fiber 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 or the Company undergoes a fundamental change (as defined in the Indenture), subject to certain conditions, holders may require Uniti Fiber 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 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 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 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.
32
Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements – Continued
(unaudited)
On June 28, 2019, Uniti Fiber, the Company and Barclays Capital Inc., on behalf of the initial purchasers involved in the offering of the Exchangeable Notes (the “Initial Purchasers”), entered into a registration rights agreement with respect to the Company’s common stock deliverable upon exchange of the Exchangeable Notes (the “Registration Rights Agreement”). Under the Registration Rights Agreement, the Company has agreed to file a shelf registration statement to register the resale of the common stock of the Company deliverable upon exchange of the Exchangeable Notes. The Company has agreed to use its commercially reasonable efforts to cause such shelf registration statement to become effective on or prior to the 365th day after the issue date of the Exchangeable Notes.
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 is recognized as a debt discount, represents 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 will be amortized to interest expense using an effective interest rate of 11.1% over the term of the Exchangeable Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
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 Condensed 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 component are netted with the equity component in stockholders’ equity, which netted to $80.8 million.
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 Condensed Consolidated Statements of Income.Income. For the three and nine months ended September 30, 2018, 2019, we recognized $3.7$4.3 million and $11.0$11.8 million, respectively, of non-cash interest expense related to the amortization of deferred financing costs. For the three and nine months ended September 30, 2017, 2018, we recognized $2.9$3.7 million and $8.0$11.0 million, respectively, of non-cash interest expense related to the amortization of deferred financing costs.
Note 10.11. 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 earnings per sharePrior to the second quarter of 2019, the earnings-per-share impact of the Company’s 3% Convertible Preferred Stock, $0.0001 par value (“Series A Shares”), issued in connection with the May 2, 2016 acquisition of PEG Bandwidth, LLC, iswas calculated using the net share settlement method, whereby
24
Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements – Continued
(unaudited)
the redemption value of the instrument is assumed to be settled in cash and only the conversion premium, if any, is assumed to be settled in shares. The Series A Shares provideprovided Uniti the option to settle the instrument in cash or
33
Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements – Continued
(unaudited)
shares. During the second quarter of 2019, the Company received notice from the holder of the Series A Shares of its election to convert all its shares, and itthe Company made an election to issue shares upon conversion, which occurred on July 2, 2019. As a result, the earnings-per-share impact for the three and nine months ended September 30, 2019, is our policy to settlecalculated based on the instrument in cash upon conversion.shares outstanding from the issuance date through September 30, 2019.
The Huntdilutive effect of the Exchangeable Notes (see Note 10) 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 and nine months ended September 30, 2019, 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 July 3, 2017 merger agreement providesfor our acquisition of Hunt provided for the issuance of additional common shares upon the achievement of certain defined revenue milestones. See Note 46. The earnings per share impact of the Hunt Contingent Consideration is calculated under the method described in ASC 260 for the treatment of contingently issuable shares in weighted-average shares outstanding.On January 4, 2019, we settled the Hunt Contingent Consideration in full satisfaction of the obligation through the issuance of 645,385 common shares having a fair value of $11.2 million.
The following sets forth the computation of basic and diluted earnings per share under the two-class method:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||||
(Thousands, except per share data) |
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||||||
Basic earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to shareholders |
| $ | 4,131 |
|
| $ | 4,728 |
|
| $ | 1,838 |
|
| $ | (31,732 | ) | ||||||||||||||||
Net (loss) income attributable to shareholders |
| $ | (19,420 | ) |
| $ | 4,131 |
|
| $ | 21,739 |
|
| $ | 1,838 |
| ||||||||||||||||
Less: Income allocated to participating securities |
|
| (395 | ) |
|
| (388 | ) |
|
| (1,264 | ) |
|
| (1,156 | ) |
|
| (50 | ) |
|
| (395 | ) |
|
| (301 | ) |
|
| (1,264 | ) |
Income allocated to participating securities on share settled contingent consideration arrangements |
|
| (260 | ) |
|
| - |
|
|
| (728 | ) |
|
| - |
|
|
| - |
|
|
| (260 | ) |
|
| - |
|
|
| (728 | ) |
Dividends declared on convertible preferred stock |
|
| (656 | ) |
|
| (656 | ) |
|
| (1,968 | ) |
|
| (1,968 | ) |
|
| - |
|
|
| (656 | ) |
|
| (656 | ) |
|
| (1,968 | ) |
Amortization of discount on convertible preferred stock |
|
| (745 | ) |
|
| (745 | ) |
|
| (2,235 | ) |
|
| (2,235 | ) |
|
| - |
|
|
| (745 | ) |
|
| (993 | ) |
|
| (2,235 | ) |
Net income (loss) attributable to common shares |
| $ | 2,075 |
|
| $ | 2,939 |
|
| $ | (4,357 | ) |
| $ | (37,091 | ) | ||||||||||||||||
Net (loss) income attributable to common shares |
| $ | (19,470 | ) |
| $ | 2,075 |
|
| $ | 19,789 |
|
| $ | (4,357 | ) | ||||||||||||||||
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average common shares outstanding |
|
| 175,396 |
|
|
| 174,818 |
|
|
| 175,101 |
|
|
| 166,624 |
|
|
| 191,940 |
|
|
| 175,396 |
|
|
| 185,746 |
|
|
| 175,101 |
|
Basic earnings (loss) per common share |
| $ | 0.01 |
|
| $ | 0.02 |
|
| $ | (0.02 | ) |
| $ | (0.22 | ) |
| $ | (0.10 | ) |
| $ | 0.01 |
|
| $ | 0.11 |
|
| $ | (0.02 | ) |
2534
Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements – Continued
(unaudited)
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||||
(Thousands, except per share data) |
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||||||
Diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to shareholders |
| $ | 4,131 |
|
| $ | 4,728 |
|
| $ | 1,838 |
|
| $ | (31,732 | ) | ||||||||||||||||
Net (loss) income attributable to shareholders |
| $ | (19,420 | ) |
| $ | 4,131 |
|
| $ | 21,739 |
|
| $ | 1,838 |
| ||||||||||||||||
Less: Income allocated to participating securities |
|
| (395 | ) |
|
| (388 | ) |
|
| (1,264 | ) |
|
| (1,156 | ) |
|
| (50 | ) |
|
| (395 | ) |
|
| (301 | ) |
|
| (1,264 | ) |
Income allocated to participating securities on share settled contingent consideration arrangements |
|
| (260 | ) |
|
| - |
|
|
| (728 | ) |
|
| - |
|
|
| - |
|
|
| (260 | ) |
|
| - |
|
|
| (728 | ) |
Dividends declared on convertible preferred stock |
|
| (656 | ) |
|
| (656 | ) |
|
| (1,968 | ) |
|
| (1,968 | ) |
|
| - |
|
|
| (656 | ) |
|
| (656 | ) |
|
| (1,968 | ) |
Amortization of discount on convertible preferred stock |
|
| (745 | ) |
|
| (745 | ) |
|
| (2,235 | ) |
|
| (2,235 | ) |
|
| - |
|
|
| (745 | ) |
|
| (993 | ) |
|
| (2,235 | ) |
Mark-to-market gain on share settled contingent consideration arrangements |
|
| - |
|
|
| (6,964 | ) |
|
| - |
|
|
| (6,964 | ) | ||||||||||||||||
Net income (loss) attributable to common shares |
| $ | 2,075 |
|
| $ | (4,025 | ) |
| $ | (4,357 | ) |
| $ | (44,055 | ) | ||||||||||||||||
Impact on if-converted dilutive securities |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
| ||||||||||||||||
Net (loss) income attributable to common shares |
| $ | (19,470 | ) |
| $ | 2,075 |
|
| $ | 19,789 |
|
| $ | (4,357 | ) | ||||||||||||||||
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average common shares outstanding |
|
| 175,396 |
|
|
| 174,818 |
|
|
| 175,101 |
|
|
| 166,624 |
|
|
| 191,940 |
|
|
| 175,396 |
|
|
| 185,746 |
|
|
| 175,101 |
|
Contingent consideration (See Note 4) |
|
| - |
|
|
| 581 |
|
|
| - |
|
|
| 192 |
| ||||||||||||||||
Effect of dilutive non-participating securities |
|
| 257 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 257 |
|
|
| - |
|
|
| - |
|
Impact on if-converted dilutive securities |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
| ||||||||||||||||
Weighted-average shares for dilutive earnings per common share |
|
| 175,653 |
|
|
| 175,399 |
|
|
| 175,101 |
|
|
| 166,816 |
|
|
| 191,940 |
|
|
| 175,653 |
|
|
| 185,746 |
|
|
| 175,101 |
|
Dilutive earnings (loss) per common share |
| $ | 0.01 |
|
| $ | (0.02 | ) |
| $ | (0.02 | ) |
| $ | (0.26 | ) |
| $ | (0.10 | ) |
| $ | 0.01 |
|
| $ | 0.11 |
|
| $ | (0.02 | ) |
For the three and nine months ended September 30, 2019, 27,758,769 potential common shares related to the Exchangeable Notes and 517,060 non-participating securities were excluded from the computation of earnings per share, as their effect would have been anti-dilutive. For the three and nine months ended September 30, 2018, 632,484 potential common shares related to Hunt Contingent Consideration were excluded from the computation of diluted earnings per share, as their effect would have been anti-dilutive. For the nine months ended September 30, 2018, 491,528 non-participating securities and 632,484 potential common shares related to Hunt Contingent Consideration were excluded from the computation of diluted earnings per share, as their effect would have been anti-dilutive. For the nine months ended September 30, 2017, 29,481 non-participating securities were excluded from the computation of diluted earnings per share, as their effect would have been anti-dilutive.
Note 11.12. Segment Information
Our management, including our chief executive officer, who is our chief operating decision maker, manages our operations as four4 reportable segments in addition to our corporate operations, which include:
Leasing: Represents the results from our leasing programs,business, Uniti Leasing, which is engaged in the acquisition of mission-critical communications assets and leasing them back to anchor customers on either an exclusive or shared-tenant basis.
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.
Towers: Represents the operations of our towers business, Uniti Towers, through which we acquire and construct tower and tower-related real estate which we thenand lease space on communications towers to our customerswireless service providers and other tenants in the United States. On April 2, 2019, the Company completed the sale of LATAM and no longer has on-going operations in Latin America. On May 23, 2019, the Company completed the sale of substantially all of its ground lease business located across the United States. See Note 5.
Consumer CLEC: Represents the operations of Talk America Services (“Talk America”) through which we operate the Consumer CLEC Business, which prior to the Spin-Off was reported as an integrated operation within Windstream. Talk America provides local telephone, high-speed internet and long distance services to customers in the eastern and central United States. We have commenced a wind down of our Consumer CLEC business, which we estimate will be completed during the second quarter of 2020.
2635
Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements – Continued
(unaudited)
Corporate: Represents our corporate and back office 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 definedwe define as net income determined in accordance with GAAP, before interest expense, provision for income taxes, depreciation and amortization, stock-based compensation expense, the impact, which may be recurring in nature, of transaction and integration related expenses, the write off of unamortized deferred financing costs, costs incurred as a result of the early repayment of debt, changes in the fair value of contingent consideration and financial instruments, and other similar items. 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 and nine months ended September 30, 20182019 and 2017:2018:
|
| Three Months Ended September 30, 2018 |
|
| Three Months Ended September 30, 2019 |
| ||||||||||||||||||||||||||||||||||||||||||
(Thousands) |
| Leasing |
|
| Fiber Infrastructure |
|
| Towers |
|
| Consumer CLEC |
|
| Corporate |
|
| Subtotal of Reportable Segments |
|
| Leasing |
|
| Fiber Infrastructure |
|
| Towers |
|
| Consumer CLEC |
|
| Corporate |
|
| Subtotal of Reportable Segments |
| ||||||||||||
Revenues |
| $ | 174,822 |
|
| $ | 70,130 |
|
| $ | 4,319 |
|
| $ | 3,365 |
|
| $ | - |
|
| $ | 252,636 |
|
| $ | 179,648 |
|
| $ | 77,979 |
|
| $ | 3,273 |
|
| $ | 2,729 |
|
| $ | - |
|
| $ | 263,629 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
| $ | 174,123 |
|
| $ | 28,480 |
|
| $ | 1,213 |
|
| $ | 765 |
|
| $ | (5,421 | ) |
| $ | 199,160 |
|
| $ | 178,095 |
|
| $ | 30,536 |
|
| $ | (417 | ) |
| $ | 465 |
|
| $ | (6,021 | ) |
| $ | 202,658 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 80,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 104,655 |
|
Depreciation and amortization |
|
| 83,857 |
|
|
| 26,605 |
|
|
| 1,734 |
|
|
| 498 |
|
|
| 54 |
|
|
| 112,748 |
|
|
| 70,227 |
|
|
| 28,652 |
|
|
| 1,643 |
|
|
| 594 |
|
|
| 50 |
|
|
| 101,166 |
|
Other income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1,038 | ) | ||||||||||||||||||||||||
Transaction related costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2,323 |
| ||||||||||||||||||||||||
Other expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 540 |
| ||||||||||||||||||||||||
Transaction related and other costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 15,179 |
| ||||||||||||||||||||||||
Gain on sale of real estate |
|
| (131 | ) |
|
| - |
|
|
| (74 | ) |
|
| - |
|
|
| - |
|
|
| (205 | ) | ||||||||||||||||||||||||
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1,963 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2,845 |
|
Income tax benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1,466 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1,745 | ) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 4,224 |
| ||||||||||||||||||||||||
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | (19,777 | ) |
36
Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements – Continued
(unaudited)
|
| Three Months Ended September 30, 2018 |
| |||||||||||||||||||||
(Thousands) |
| Leasing |
|
| Fiber Infrastructure |
|
| Towers |
|
| Consumer CLEC |
|
| Corporate |
|
| Subtotal of Reportable Segments |
| ||||||
Revenues |
| $ | 174,822 |
|
| $ | 70,130 |
|
| $ | 4,319 |
|
|
| 3,365 |
|
| $ | - |
|
| $ | 252,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
| $ | 174,123 |
|
| $ | 28,480 |
|
| $ | 1,213 |
|
| $ | 765 |
|
| $ | (5,421 | ) |
| $ | 199,160 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 80,406 |
|
Depreciation and amortization |
|
| 83,857 |
|
|
| 26,605 |
|
|
| 1,734 |
|
|
| 498 |
|
|
| 54 |
|
|
| 112,748 |
|
Other income, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1,038 | ) |
Transaction related and other costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2,323 |
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1,963 |
|
Income tax benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1,466 | ) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 4,224 |
|
|
| Three Months Ended September 30, 2017 |
| |||||||||||||||||||||
(Thousands) |
| Leasing |
|
| Fiber Infrastructure |
|
| Towers |
|
| Consumer CLEC |
|
| Corporate |
|
| Subtotal of Reportable Segments |
| ||||||
Revenues |
| $ | 171,673 |
|
| $ | 66,363 |
|
| $ | 2,796 |
|
|
| 4,378 |
|
| $ | - |
|
| $ | 245,210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
| $ | 171,215 |
|
| $ | 28,348 |
|
| $ | (98 | ) |
| $ | 1,025 |
|
| $ | (5,552 | ) |
| $ | 194,938 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 78,784 |
|
Depreciation and amortization |
|
| 87,320 |
|
|
| 24,050 |
|
|
| 1,326 |
|
|
| 652 |
|
|
| 96 |
|
|
| 113,444 |
|
Other income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (3,933 | ) |
Transaction related costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 8,512 |
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1,968 |
|
Income tax benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (8,672 | ) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 4,835 |
|
|
| Nine Months Ended September 30, 2019 |
| |||||||||||||||||||||
(Thousands) |
| Leasing |
|
| Fiber Infrastructure |
|
| Towers |
|
| Consumer CLEC |
|
| Corporate |
|
| Subtotal of Reportable Segments |
| ||||||
Revenues |
| $ | 532,773 |
|
| $ | 236,139 |
|
| $ | 11,499 |
|
| $ | 8,663 |
|
| $ | - |
|
| $ | 789,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
| $ | 528,727 |
|
| $ | 97,572 |
|
| $ | (134 | ) |
| $ | 1,676 |
|
| $ | (18,044 | ) |
| $ | 609,797 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 286,842 |
|
Depreciation and amortization |
|
| 216,254 |
|
|
| 85,405 |
|
|
| 4,470 |
|
|
| 1,286 |
|
|
| 156 |
|
|
| 307,571 |
|
Other income, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (24,848 | ) |
Transaction related and other costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 28,883 |
|
Gain on sale of real estate |
|
| (5,091 | ) |
|
| - |
|
|
| (23,904 | ) |
|
| - |
|
|
| - |
|
|
| (28,995 | ) |
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 7,930 |
|
Income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 10,152 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 22,262 |
|
27
37
Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements – Continued
(unaudited)
| Nine Months Ended September 30, 2018 |
|
| Nine Months Ended September 30, 2018 |
| |||||||||||||||||||||||||||||||||||||||||||
(Thousands) |
| Leasing |
|
| Fiber Infrastructure |
|
| Towers |
|
| Consumer CLEC |
|
| Corporate |
|
| Subtotal of Reportable Segments |
|
| Leasing |
|
| Fiber Infrastructure |
|
| Towers |
|
| Consumer CLEC |
|
| Corporate |
|
| Subtotal of Reportable Segments |
| ||||||||||||
Revenues |
| $ | 521,481 |
|
| $ | 204,486 |
|
| $ | 10,161 |
|
| $ | 10,752 |
|
| $ | - |
|
| $ | 746,880 |
|
| $ | 521,481 |
|
| $ | 204,486 |
|
| $ | 10,161 |
|
| $ | 10,752 |
|
| $ | - |
|
| $ | 746,880 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
| $ | 519,848 |
|
| $ | 87,080 |
|
| $ | (417 | ) |
| $ | 2,606 |
|
| $ | (16,245 | ) |
| $ | 592,872 |
|
| $ | 519,848 |
|
| $ | 87,080 |
|
| $ | (417 | ) |
| $ | 2,606 |
|
| $ | (16,245 | ) |
| $ | 592,872 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 237,398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 237,398 |
|
Depreciation and amortization |
|
| 257,055 |
|
|
| 78,754 |
|
|
| 4,786 |
|
|
| 1,495 |
|
|
| 221 |
|
|
| 342,311 |
|
|
| 257,055 |
|
|
| 78,754 |
|
|
| 4,786 |
|
|
| 1,495 |
|
|
| 221 |
|
|
| 342,311 |
|
Other income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1,574 | ) | ||||||||||||||||||||||||
Transaction related costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 12,025 |
| ||||||||||||||||||||||||
Other income, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1,574 | ) | ||||||||||||||||||||||||
Transaction related and other costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 12,025 |
| ||||||||||||||||||||||||
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 6,058 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 6,058 |
|
Income tax benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (5,208 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (5,208 | ) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 1,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 1,862 |
|
|
| Nine Months Ended September 30, 2017 |
| |||||||||||||||||||||
(Thousands) |
| Leasing |
|
| Fiber Infrastructure |
|
| Towers |
|
| Consumer CLEC |
|
| Corporate |
|
| Subtotal of Reportable Segments |
| ||||||
Revenues |
| $ | 512,893 |
|
| $ | 136,158 |
|
| $ | 6,679 |
|
|
| 13,966 |
|
| $ | - |
|
| $ | 669,696 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
| $ | 511,803 |
|
| $ | 52,533 |
|
| $ | (1,075 | ) |
| $ | 3,514 |
|
| $ | (15,265 | ) |
| $ | 551,510 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 227,235 |
|
Depreciation and amortization |
|
| 261,037 |
|
|
| 50,618 |
|
|
| 3,505 |
|
|
| 1,955 |
|
|
| 289 |
|
|
| 317,404 |
|
Other expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 9,638 |
|
Transaction related costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 32,213 |
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 5,621 |
|
Income tax benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (8,976 | ) |
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | (31,625 | ) |
Note 12.13. 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.
Pursuant to the Separation and Distribution Agreement entered into with Windstream in connection with the Spin-Off, Windstream has agreed to indemnify us (including our subsidiaries, directors, officers, employees and agents and certain other related parties) for any liability arising from or relating to legal proceedings involving Windstream's telecommunications business prior to the Spin-Off, and, pursuant to the Master Lease, Windstream has agreed to indemnify us for, among other things, any use, misuse, maintenance or repair by Windstream with respect to the Distribution Systems. Windstream is currently a party to various legal actions and administrative proceedings, including various claims arising in the ordinary course of its telecommunications business, which are subject to the indemnities provided to us by Windstream. If Windstream assumes the Separation and Distribution Agreement and/or the Master Lease in bankruptcy, it would be obligated to us.honor all indemnification claims arising under such agreement. If the Separation and Distribution Agreement and or the Master Lease are rejected in Windstream’s bankruptcy, any claims on the applicable indemnity would be treated as unsecured claims, and, if that were to occur, there can be no assurance we would receive any related indemnification payments from Windstream in connection with the applicable indemnity claims.
28On July 25, 2019, in connection with Windstream’s bankruptcy, Windstream Holdings and Windstream Services, LLC filed a complaint with the U.S. Bankruptcy Court for the Southern District of New York against the Company and certain of its affiliates, alleging¸ among other things, that the Master Lease should be recharacterized as a financing arrangement, that the Master Lease is a lease of personal property, and that rent payments and tenant capital improvements made by Windstream under the Master Lease since at least the third quarter of 2017 constitute constructive fraudulent transfers. If the Master Lease is recharacterized as a financing arrangement, Windstream would be deemed the true owner of the property subject to the Master Lease, and Uniti would be treated as a creditor of Windstream rather than as a landlord, which could significantly affect current payments to us under the Master Lease, the ultimate treatment of our claims (including potentially through changing our status to that of a creditor that would share in creditor recoveries from the estate rather than receive rent payments) and our status as a REIT. If the Master Lease is determined to be a lease of personal property, the deadline for Windstream Holdings to assume or reject the Master Lease would be the confirmation of its plan by the bankruptcy court, and Windstream may seek from the bankruptcy court relief from its current performance obligations during the bankruptcy case. If the constructive fraudulent transfer claim is successful, Uniti may be required to repay Windstream the amount of rent payments and tenant capital improvements since at least the third quarter of 2017. In parallel with this filing, Windstream Holdings also filed a motion to stay the deadline under which Windstream must assume or reject the Master Lease pending the resolution of issues raised in the complaint. A mediation of these claims is ongoing in Windstream’s bankruptcy. In connection with the mediation, Uniti has agreed to an extension of the assumption deadline for the Master Lease to December 7, 2019. In exchange,
38
Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements – Continued
(unaudited)
Windstream has provided certain assurances regarding the continued payment of rent pursuant to the Master Lease during the extension period and following the expiration of the extension period, Windstream will continue to make payments under the Master Lease as they come due, unless and until Windstream obtains an order from the bankruptcy court permitting cessation of such payments.
We believe that it is unlikely that a court will determine that the Master Lease should be recharacterized as a financing transaction, that the Master Lease is a lease of personal property, or that rent payments and tenant capital improvements made by Windstream under the Master Lease since at least the third quarter of 2017 constitute constructive fraudulent transfers. We intend to defend this matter vigorously, and, because it is still in its preliminary stages, have not yet determined what effect these claims will have, if any, on our financial position or results of operations. As of the date of this Quarterly Report on Form 10-Q, we are unable to estimate a reasonably possible range of loss and therefore have not recorded any liabilities associated with these claims in our Condensed Consolidated Balance Sheet. However, it is difficult to predict what could occur in Windstream’s bankruptcy restructuring, including any judicial decisions in respect of claims against us by Windstream or its creditors. Any adverse determination or judicial decision could have a material adverse effect on our business, financial position or results of operations.
On July 3, 2019, SLF Holdings, LLC (“SLF”) filed a complaint against the Company, Uniti Fiber, and certain current and former officers of the Company (collectively, the “Defendants”) in the United States District Court for the Southern District of Alabama, in connection with Uniti Fiber’s purchase of Southern Light, LLC from SLF in July 2017. The complaint asserts claims for fraud and conspiracy, as well as claims under federal and Alabama securities laws, alleging that Defendants improperly failed to disclose to SLF the risk that the 2015 Spin-Off and entry into the Master Lease violated certain debt covenants of Windstream. SLF seeks compensatory and punitive damages, as well as reformation of the purchase agreement for the sale. We intend to defend this matter vigorously, and, because it is still in its preliminary stages, have not yet determined what effect this lawsuit will have, if any, on our financial position or results of operations. On September 26, 2019, the case was transferred to United States District Court for the District of Delaware. As of the date of this Quarterly Report on Form 10-Q, we are unable to estimate a reasonably possible range of loss and therefore have not recorded any liabilities associated with these claims in our Condensed Consolidated Balance Sheet.
On October 25, 2019, Ibrahim E. Safadi filed a putative class action in the U.S. District Court for the Eastern District of Arkansas against the Company and certain of our officers alleging violations of federal securities laws. The putative class action seeks to represent investors who acquired the Company’s securities between April 20, 2015 and February 15, 2019. The lawsuit asserts violations under Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder, alleging that the Company made materially false and misleading statements by allegedly failing to disclose that the Spin-Off and entry in the Master Lease violated certain debt covenants of Windstream. The lawsuit seeks class certification, unspecified monetary damages, costs and attorneys’ fees and other relief. We intend to defend this matter vigorously, and, because it is still in its preliminary stages, have not yet determined what effect this lawsuit will have, if any, on our financial position or results of operations. As of the date of this Quarterly Report on Form 10-Q, we are unable to estimate a reasonably possible range of loss and therefore have not recorded any liabilities associated with these claims in our Condensed Consolidated Balance Sheet.
Under the terms of the Tax Matters Agreementtax matters agreement entered into withon 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 Internal Revenue 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 no0 such liabilities in our consolidated balance sheet.Condensed Consolidated Balance Sheet as of September 30, 2019.
Note 13.14. Accumulated Other Comprehensive (Loss) Income
Changes in accumulated other comprehensive (loss) income by component is as follows for the three and nine months ended September 30, 2019 and 2018:
39
Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements – Continued
(unaudited)
|
| Nine Months Ended September 30, |
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| |||||||||||||||
(Thousands) |
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||||
Cash flow hedge changes in fair value gain (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period attributable to common shareholders |
| $ | 6,351 |
|
| $ | (6,102 | ) |
| $ | (18,960 | ) |
| $ | 55,074 |
|
| $ | 30,042 |
|
| $ | 6,351 |
|
Other comprehensive income (loss) before reclassifications |
|
| 53,968 |
|
|
| (20,591 | ) | ||||||||||||||||
Other comprehensive (loss) income before reclassifications |
|
| (7,906 | ) |
|
| 7,651 |
|
|
| (53,989 | ) |
|
| 53,968 |
| ||||||||
Amounts reclassified from accumulated other comprehensive income |
|
| (739 | ) |
|
| 93 |
|
|
| (4,705 | ) |
|
| 3,649 |
| ||||||||
Balance at end of period |
|
| (27,605 | ) |
|
| 62,818 |
|
|
| (28,652 | ) |
|
| 63,968 |
| ||||||||
Less: Other comprehensive (loss) income attributable to noncontrolling interest |
|
| (153 | ) |
|
| 179 |
|
|
| (1,200 | ) |
|
| 1,329 |
| ||||||||
Balance at end of period attributable to common shareholders |
|
| (27,452 | ) |
|
| 62,639 |
|
|
| (27,452 | ) |
|
| 62,639 |
| ||||||||
Foreign currency translation gain (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Balance at beginning of period attributable to common shareholders |
|
| - |
|
|
| 1,163 |
|
|
| 63 |
|
|
| 1,470 |
| ||||||||
Translation adjustments |
|
| - |
|
|
| 2,547 |
|
|
| - |
|
|
| 2,233 |
| ||||||||
Amounts reclassified from accumulated other comprehensive income |
|
| 3,649 |
|
|
| 16,251 |
|
|
| - |
|
| - |
|
|
| (63 | ) |
| - |
| ||
Balance at end of period |
|
| 63,968 |
|
|
| (10,442 | ) |
|
| - |
|
|
| 3,710 |
|
|
| - |
|
|
| 3,703 |
|
Less: Other comprehensive income attributable to noncontrolling interest |
|
| 1,329 |
|
|
| 41 |
|
|
| - |
|
|
| 58 |
|
|
| - |
|
|
| 51 |
|
Balance at end of period attributable to common shareholders |
|
| 62,639 |
|
|
| (10,483 | ) |
|
| - |
|
|
| 3,652 |
|
|
| - |
|
|
| 3,652 |
|
Foreign currency translation gain (loss): |
|
|
|
|
|
|
|
| ||||||||||||||||
Balance at beginning of period attributable to common shareholders |
|
| 1,470 |
|
|
| (267 | ) | ||||||||||||||||
Translation adjustments |
|
| 2,233 |
|
|
| 5,074 |
| ||||||||||||||||
Balance at end of period |
|
| 3,703 |
|
|
| 4,807 |
| ||||||||||||||||
Less: Other comprehensive income attributable to noncontrolling interest |
|
| 51 |
|
|
| 2 |
| ||||||||||||||||
Balance at end of period attributable to common shareholders |
|
| 3,652 |
|
|
| 4,805 |
| ||||||||||||||||
Accumulated other comprehensive income (loss) at end of period |
| $ | 66,291 |
|
| $ | (5,678 | ) | ||||||||||||||||
Accumulated other comprehensive income at end of period |
| $ | (27,452 | ) |
| $ | 66,291 |
|
| $ | (27,452 | ) |
| $ | 66,291 |
|
We haveUntil June 15, 2019, we had an effective shelf registration statement on file with the SEC (the “Registration Statement”) to offer and sell various securities from time to time. Under the Registration Statement, we have established an at-the-market common stock offering program (the “ATM Program”) to sell shares of common stock having an aggregate offering price of up to $250.0 million. As of September 30, 2018, 2019, the Company has issued and sold an aggregate of 3.26.7 million shares of common stock at a weighted average price of $20.52$19.92 per share under the ATM Program, receiving net proceeds of $64.4$131.2 million, after commissions of $0.8$1.7 million and other offering costs.
Note 15. Subsequent Events The ATM Program is currently suspended following the June 15, 2019 expiration of the Registration Statement.
On November 1, 2018, we announced the acquisition of Information Transport Solutions, Inc. (“ITS”) for cash consideration of $54 million. ITS is a full-service managed services provider of technology solutions, primarily to educational institutions in Alabama and Florida.
On October 9, 2018, we completed the previously announced sale-leaseback and fiber assets acquisition from CableSouth Media, LLC (“CableSouth”) for cash consideration of $31 million. In the transaction,July 2, 2019, the Company acquired approximately 43,000 fiber strand miles located across Arkansas, Louisiana and Mississippi,issued 8,677,163 shares of which 34,000 fiber strand miles were leased back to CableSouth onits commons stock in connection with the conversion by PEG Bandwidth Holdings, LLC of 87,500 shares of the Series A Shares. The Company issued common stock with a
29
Uniti Group Inc.
Notes to the Condensed Consolidated Financial Statements – Continued
(unaudited)
triple-net basis. Uniti has exclusive use of 9,000 fiber strand miles, which are adjacent to Uniti Fiber’s southern network footprint. The initial lease term is 20 years with four 5-year renewal options at CableSouth’s discretion. Annual cash rent is initially $2.9$87.5 million, with a fixed annual escalatorthe total number of 2.0%.shares calculated based on the five-day volume weighted average price of its common stock ending on June 27, 2019. Upon conversion, all outstanding Series A Shares were cancelled and no longer remain outstanding. The issuance by the Company of the common stock was made in reliance upon the exception from registration requirements pursuant to Section 3(a)(9) of the Securities Act.
3040
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following management’s discussion and analysis of financial condition and results of operations describes the principal factors affecting the results of our operations, financial condition, and changes in financial condition for the three and nine months ended September 30, 2018.2019. This discussion should be read in conjunction with the accompanying unaudited financial statements,Condensed Consolidated Financial Statements, and the notes thereto set forth in Part I, Item 1 of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2017,2018, filed with the Securities and Exchange Commission (the “SEC”) on March 1, 2018.18, 2019.
Overview
Company Description
Uniti Group Inc. (the “Company”, “Uniti”, “we”, “us” or “our”) is an independent, internally-managedinternally managed real estate investment trust (“REIT”) engaged in the acquisition and construction of mission critical infrastructure in the communications industry. We are principally focused on acquiring and constructing fiber optic broadband networks, wireless communications towers, copper and coaxial broadband networks and data centers.
On April 24, 2015, we were separated and spun-off (the “Spin-Off”) from Windstream Holdings, Inc. (“Windstream Holdings” and together with its subsidiaries, “Windstream”) pursuant to which Windstream contributed certain telecommunications network assets, including fiber and copper networks and other real estate (the “Distribution Systems”) and a small consumer competitive local exchange carrier (“CLEC”) business (the “Consumer CLEC Business”) to Uniti and Uniti issued common stock and indebtedness and paid cash obtained from borrowings under Uniti’s senior credit facilities to Windstream. In connection with the Spin-Off, we 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 all of our leasing revenues are currently derived.
Uniti operates as a REIT for U.S. federal income tax purposes. As a REIT, the Company is generally not subject to U.S. federal income taxes on income generated by its REIT operations, which includes income derived from the Master Lease. We have elected to treat the subsidiaries through which we operate our fiber business, Uniti Fiber, and Talk America Services, LLC, which operates the Consumer CLEC Business (“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.
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. This 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 September 30, 2018,2019, we are the sole general partner of the Operating Partnership and own approximately 97.7%98.2% of the partnership interests in the Operating Partnership.
We expect to grow and diversify our portfolio and tenant base by pursuing a range of transaction structures with communication service providers, including, (i) sale leaseback transactions, whereby we acquire existing infrastructure assets from third parties, including communication service providers, and lease them back on a long-term triple-net basis; (ii) whole company acquisitions, which may include the use of one or more TRSs that are permitted under the tax laws to acquire and operate non-REIT businesses and assets subject to certain limitations; (iii) capital investment financing, whereby we offer communication service providers a cost efficient method of raising funds for discrete capital investments to upgrade or expand their network; and (iv) mergers and acquisitions financing, whereby we facilitate mergers and acquisition transactions as a capital partner, including through operating company/property company (“OpCo-PropCo”) structures.
We manage our operations as four reportable business segments in addition to our corporate operations:
Leasing Segment: Represents our REIT operations and includes the results from our leasing business, Uniti Leasing, which is engaged in the acquisition of mission-critical communications assets and leasing them to anchor customers on either an exclusive or shared-tenant basis. Uniti Leasing is a component of our REIT operations.
Fiber Infrastructure Segment: 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.
41
Towers Segment: Represents the operations of our towers business, Uniti Towers, through which we acquire and construct tower and tower-related real estate and lease space on communications towers to wireless service providers and other tenants in the United StatesStates. On April 2, 2019, the Company completed the sale of LATAM and no longer has on-going operations in Latin America.America. On May 23, 2019, the Company completed the sale of substantially all of its ground lease business located across the United States. Uniti Towers is a component of our REIT operations.
31
Consumer CLEC Segment: Represents the operations of Talk America through which we operate the Consumer CLEC Business.Business that prior to the Spin-Off was reported as an integrated operation within Windstream. Talk America provides local telephone, high-speed internet and long distancelong-distance services to customers in the eastern and central United States. We have commenced a wind down of our Consumer CLEC business, which we estimate will be completed during the second quarter of 2020.
Corporate Operations: Represents our corporate office and centrally managedshared service functions. Certain costs and expenses, primarily related to headcount, information technology systems, insurance, professional fees and similar charges, that are directly attributable to operations of our business segments are allocated to the respective segments.
We evaluate the performance of each segment based on 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, the impact, which may be recurring in nature, of transaction and integration related expenses, the write off of unamortized deferred financing costs, costs incurred as a result of the early repayment of debt, changes in the fair value of contingent consideration and financial instruments, and other similar items. For more information on Adjusted EBITDA, see “Non-GAAP Financial Measures.” Detailed information about our segments can be found in Note 1112 to our condensed consolidated financial statementsaccompanying Condensed Consolidated Financial Statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Significant Business Developments
Windstream Bankruptcy Filing.Windstream was involved in litigation with an entity who acquired certain Windstream debt securities and thereafter issued a notice of default as to such securities relating to the Spin-Off. Windstream challenged the matter in federal court and a trial was held in July 2018. On February 15, 2019, the federal court judge issued a ruling against Windstream, finding that Windstream’s attempts to waive such default were not valid; that an “event of default” occurred with respect to such debt securities; and that the holder’s acceleration of such debt in December 2017 was effective. Following the adverse outcome, on February 25, 2019, Windstream filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York.
AcquisitionIn bankruptcy, Windstream has the option to assume or reject the Master Lease. Because the Master Lease is a single indivisible Master Lease with a single rent payment, it must be assumed or rejected in whole and cannot be sub-divided by facility or market absent Uniti’s consent. A significant amount of Information Transport Solutions, Inc.Windstream’s revenue is generated from the use of our network included in the Master Lease, and we believe that the Master Lease is essential to Windstream’s operations. Furthermore, Windstream is designated as a “carrier of last resort” in certain markets where it utilizes the Master Lease to provide service to its customers, and Windstream would require approval from the Public Utility Commissions and the Federal Communications Commission to cease providing service in those markets. As a result, we believe the probability of Windstream rejecting the Master Lease in bankruptcy to be remote. Windstream has filed claims against us alleging, among other things: that the Master Lease should be recharacterized as a financing transaction, which would impact its treatment in Windstream’s bankruptcy (including potentially through changing our status to that of a creditor that would share in creditor recoveries from the estate rather than receive rent payments) and could affect our status as a REIT; that the Master Lease is a lease of personal property; and that rent payments and tenant capital improvements made by Windstream under the Master Lease since at least the third quarter of 2017 constitute constructive fraudulent transfers. A mediation of these claims is ongoing in Windstream’s bankruptcy. In connection with the mediation, Uniti has agreed to an extension of the assumption deadline for the Master Lease to December 7, 2019. In exchange, Windstream has provided certain assurances regarding the continued payment of rent pursuant to the Master Lease during the extension period and following the expiration of the extension period, Windstream will continue to make payments under the Master Lease as they come due, unless and until Windstream obtains an order from the bankruptcy court permitting cessation of such payments. A rejection by Windstream of the Master Lease, an adverse determination by a judge on Windstream’s claims against us, or Windstream’s inability or unwillingness to meet its rent and other obligations under the Master Lease could materially adversely affect our consolidated results of operations, liquidity, and financial condition, including our ability to service debt, comply with debt covenants and maintain our status as a REIT.
In addition, a rejection of the Master Lease by Windstream would result in an “event of default” under our Credit Agreement if we are unable to enter into a replacement lease that satisfies certain criteria set forth in the Credit Agreement 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 5.0 to 1.0. Our Credit Agreement prohibits the Company from amending the Master Lease in a manner that, among other provisions, pro
42
forma for any such amendment, would result in our consolidated secured leverage ratio to exceed 5.0 to 1.0, and management has no intention to enter into a lease amendment that would violate our debt covenants.
Although the Master Lease contains no provision that contemplates renegotiation of the lease and the bankruptcy court has no ability to unilaterally reset the rent or terms of the Master Lease, it is difficult to predict what could occur in Windstream’s bankruptcy restructuring, including any judicial decisions in respect of claims against us by Windstream or its creditors. Any adverse determination or judicial decision or disruption in rent payments could have a material adverse effect on our business, financial position or results of operations, including our ability to comply with financial and other covenants in our debt instruments.
See in Part I, Item 1A "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2018 for additional information concerning the impact Windstream’s bankruptcy and related claims may have on our REIT status, operations and financial condition.
Going Concern. There are conditions and events which raise substantial doubt about our ability to continue as a going concern, and in its opinion on our December 31, 2018 financial statements, PricewaterhouseCoopers LLP, our independent registered public accounting firm, expressed substantial doubt as to whether we could continue as a going concern during the one year period following the date those financial statements were issued as a result of Windstream’s bankruptcy petition and its potential uncertain effects on the Master Lease. Our financial statements do not include any adjustments that may result from the outcome of this uncertainty. We expect Windstream will continue to perform on the Master Lease and believe it is unlikely that Windstream will reject the Master Lease because the Master Lease is central to Windstream’s operations. We also believe that it is unlikely that a court will determine that the Master Lease should be recharacterized as a financing transaction, that the Master Lease is a lease of personal property, or that rent payments and tenant capital improvements made by Windstream under the Master Lease since at least the third quarter of 2017 constitute constructive fraudulent transfers. We have reduced our dividend and may reduce our capital expenditures, as well as seek external funding in order to sustain our operations. The failure to provide 2018 audited financial statements without a going concern opinion to the lenders under our Credit Agreement by March 31, 2019 would have constituted a breach of the covenants and an immediate event of default under our Credit Agreement, unless waived by our lenders. If an event of default were to have occurred under our Credit Agreement, the Credit Agreement’s administrative agent could have declared all outstanding loans immediately due and payable. Such an acceleration would have triggered cross-default provisions within the indentures governing our senior notes and thereby would have entitled the trustee and noteholders to accelerate the repayment of the senior notes.
On November 1,March 18, 2019, we received a limited waiver from our lenders under our Credit Agreement, waiving an event of default related solely to the receipt of a going concern opinion from our auditors for our 2018 audited financial statements. The limited waiver was issued in connection with the fourth amendment (the “Fourth Amendment”) to our Credit Agreement. During the pendency of Windstream’s bankruptcy, or at such earlier time when certain other conditions are specified, the Fourth Amendment generally limits our ability under the Credit Agreement to (i) prepay unsecured indebtedness and (ii) pay cash dividends in excess of 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gains. The Fourth Amendment also increased the interest rate on our Term Loan Facility, which now bears a rate of LIBOR, subject to a 1.0% floor, plus an applicable margin equal to 5.0%, a 200 basis point increase over our previous rate. This increase will remain in effect though the remaining term of the facility, which matures on October 24, 2022. The limited waiver would not apply to any going concern opinion we announcedmight receive from our auditors for our 2019 audited financial statements. If we conclude that we have substantial doubt as to our ability to continue as a going concern at such time, whether as a result of continued uncertainty around Windstream’s future and the acquisitionstatus of Information Transport Solutions,our Master Lease or otherwise, we would be in default under our Credit Agreement absent a new waiver or consent. We can provide no assurances as to whether we would be able to obtain a waiver or the terms thereof.
Extension of Revolving Credit Facility Maturity Date. On June 24, 2019, we entered into an amendment (the “Fifth Amendment”) to our Credit Agreement to extend the maturity date of $575.9 million of commitments under the Revolving Credit Facility to April 24, 2022, pay down approximately $101.6 million of outstanding revolving loans and terminate the related commitments. The maturity date of approximately $72.4 million of other commitments was not extended. On June 28, 2019, the Company repaid approximately $174.0 million in total borrowings, which consisted of the $101.6 million required repayment pursuant to the Fifth Amendment and $72.4 million of non-extended borrowings, thereby terminating the non-extended commitments. As a result, all remaining $575.9 million of commitments will terminate on April 24, 2022, at which time all outstanding borrowings must be repaid. The Company used a portion of the net proceeds from the offering of Exchangeable Notes described below to fund the repayments. The Fifth Amendment increased the applicable margin for base rate loans under the Revolving Credit Facility to a range of 2.75% to 3.25% and for Eurodollar rate loans under the Revolving Credit Facility to a range of 3.75% to 4.25%, calculated in a customary manner and determined based on our consolidated secured leverage ratio.
Exchangeable Notes Offering. On June 28, 2019, Uniti Fiber Holdings Inc. (“ITS”Uniti Fiber”), a subsidiary of the Company, issued $345 million aggregate principal amount of 4.00% Exchangeable Senior Notes due 2024 (the “Exchangeable Notes”). The Exchangeable
43
Notes are guaranteed by the Company and each of the Company’s subsidiaries (other than Uniti Fiber) 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’s election. The Exchangeable Notes will mature on June 15, 2024, unless earlier exchanged, redeemed or repurchased. The Exchangeable Notes were sold to qualified institutional buyers pursuant to Rule 144A under the Securities Act.
The net proceeds from the sale of the Exchangeable Notes were approximately $334.7 million, after deducting discounts and commissions to the Initial Purchasers. A portion of the net proceeds were used to repay outstanding borrowings under the Revolving Credit Facility, as described above, and to pay the cost of the exchangeable note hedge transactions, as described in Note 8 to our Condensed Consolidated Financial Statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q. The remaining net proceeds will be used for general corporate purposes, which may include funding acquisitions (including Bluebird (as defined below)) and the repayment of additional borrowings under the Revolving Credit Facility.
Bluebird Network, LLC. On August 30, 2019, the Company closed on its OpCo-PropCo transaction with Macquarie Infrastructure Partners (“MIP”) to acquire Bluebird Network, LLC (“Bluebird”). MIP operates within the Macquarie Infrastructure and Real Assets division of Macquarie Group. Bluebird’s network consists of approximately 178,000 fiber strand miles in the Midwest across Missouri, Kansas, Illinois and Oklahoma. In the transaction, Uniti has purchased the Bluebird fiber network and MIP has purchased the Bluebird operations. In addition, Uniti has sold Uniti Fiber’s Midwest operations to MIP, while Uniti retains its existing Midwest fiber network. Uniti acquired the fiber network of Bluebird for $319 million, of which $175 million was funded by Uniti in cash and $144 million from pre-paid rent received from MIP at closing. In connection with the sale of the Company’s Midwest operations, we received total upfront cash of approximately $37 million, including related pre-paid rent received from MIP at closing. Concurrently with the closing of these transactions, Uniti has leased the Bluebird fiber network and its Midwest fiber network on a combined basis to MIP, under a long-term triple net lease. The lease is reported within the results of our Leasing segment. The Midwest operations that were sold to MIP was previously reported in our Fiber Infrastructure segment.
Under the terms of our lease with MIP (the “Bluebird Lease”), we have the right, but not the obligation, to fund growth capital expenditures. Assets constructed with our capital become a part of the leased assets upon completion. MIP will compensate the Company from the date of funding based on a mix of fixed and variable payments as stipulated in the lease. The Company will recognize revenue associated with these assets from the date of completion through the end of the initial lease term. To date, the Company has committed to fund approximately $23.0 million of growth capital expenditures, of which $7.9 million has already been funded.
Sale of Ground Lease Portfolio. During the second quarter, the Company completed the sale of substantially all of its ground lease business located across the United States for cash consideration of $54$30.7 million, realizing a pre-tax gain of $5.0 million. ITS is a full-service managed services provider of technology solutions, primarily to educational institutions in Alabama and Florida, and is expected to accelerate Uniti Fiber’s product offerings and strengthen relationships with new and existing E-Rate customers. The results of this transactions will be recorded within our Fiber Infrastructure segment.
Acquisition and Lease-back of CableSouth Media, LLC Fiber Assets. On October 9, 2018, we closed onWe sold an additional ground lease during the previously announced acquisition of fiber assets from CableSouth Media, LLC (“CableSouth”) forthird quarter, receiving cash consideration of $31$2.9 million. In the transaction, Uniti acquired 43,000 fiber strand miles located across Arkansas, Louisiana and Mississippi, of which 34,000 fiber strand miles were leased back to CableSouth on a triple-net basis. Uniti has exclusive use of 9,000 fiber strand miles, which are adjacent to Uniti Fiber’s southern network footprint. The initial lease term is 20 years with four 5-year renewal options at CableSouth’s discretion. Annual cash rent is initially $2.9 million with a fixed annual escalator of 2.0%. The results of this transactions will be recorded within our Leasing segment.
Acquisition and Lease-back of U.S. TelePacific Holding Corp. Fiber Assets. During September 2018, we closed on the California assets of the previously announced acquisition and lease-back of U.S. Telepacific Holding Corp. (“TPx”) fiber assets, which included exclusive use fiber strand miles in Texas, for total cash consideration of $70 million. The initial lease term is 15 years with five 5-year renewal options at TPx’s discretion. Annual cash rent related for the non-California and California assets is initially $8.8 million with a fixed annual escalator of 1.5%. The results of this transactions will be recorded within our Leasing segment.
Comparison of the three months ended September 30, 20182019 and 20172018
The following table sets forth, for the periods indicated, our results of operations expressed as dollars and as a percentage of total revenues:
3244
| Three Months Ended September 30, |
|
| Three Months Ended September 30, |
| |||||||||||||||||||||||||||
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
| ||||||||||||||||||||
(Thousands) |
| Amount |
|
| % of Revenues |
|
| Amount |
|
| % of Revenues |
|
| Amount |
|
| % of Revenues |
|
| Amount |
|
| % of Revenues |
| ||||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leasing |
| $ | 174,822 |
|
| 69.2% |
|
| $ | 171,673 |
|
| 70.0% |
|
| $ | 179,648 |
|
| 68.2% |
|
| $ | 174,822 |
|
| 69.2% |
| ||||
Fiber Infrastructure |
|
| 70,130 |
|
| 27.8% |
|
|
| 66,363 |
|
| 27.1% |
|
|
| 77,979 |
|
| 29.6% |
|
|
| 70,130 |
|
| 27.8% |
| ||||
Tower |
|
| 4,319 |
|
| 1.7% |
|
|
| 2,796 |
|
| 1.1% |
|
|
| 3,273 |
|
| 1.2% |
|
|
| 4,319 |
|
| 1.7% |
| ||||
Consumer CLEC |
|
| 3,365 |
|
| 1.3% |
|
|
| 4,378 |
|
| 1.8% |
|
|
| 2,729 |
|
| 1.0% |
|
|
| 3,365 |
|
| 1.3% |
| ||||
Total revenues |
|
| 252,636 |
|
| 100.0% |
|
|
| 245,210 |
|
| 100.0% |
|
|
| 263,629 |
|
| 100.0% |
|
|
| 252,636 |
|
| 100.0% |
| ||||
Costs and Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
| 80,406 |
|
| 31.8% |
|
|
| 78,784 |
|
| 32.1% |
|
|
| 104,655 |
|
| 39.7% |
|
|
| 80,406 |
|
| 31.8% |
| ||||
Depreciation and amortization |
|
| 112,748 |
|
| 44.6% |
|
|
| 113,444 |
|
| 46.3% |
|
|
| 101,166 |
|
| 38.3% |
|
|
| 112,748 |
|
| 44.6% |
| ||||
General and administrative expense |
|
| 20,666 |
|
| 8.2% |
|
|
| 22,068 |
|
| 9.0% |
|
|
| 25,267 |
|
| 9.6% |
|
|
| 20,666 |
|
| 8.2% |
| ||||
Operating expense |
|
| 34,773 |
|
| 13.8% |
|
|
| 30,172 |
|
| 12.3% |
|
|
| 39,948 |
|
| 15.2% |
|
|
| 34,773 |
|
| 13.8% |
| ||||
Transaction related costs |
|
| 2,323 |
|
| 0.9% |
|
|
| 8,512 |
|
| 3.5% |
| ||||||||||||||||||
Other income |
|
| (1,038 | ) |
| (0.4%) |
|
|
| (3,933 | ) |
| (1.6%) |
| ||||||||||||||||||
Transaction related and other costs |
|
| 15,179 |
|
| 5.8% |
|
|
| 2,323 |
|
| 0.9% |
| ||||||||||||||||||
Gain on sale of real estate |
|
| (205 | ) |
| (0.1%) |
|
|
| - |
|
|
| - |
| |||||||||||||||||
Other (income) expense |
|
| (859 | ) |
| (0.3%) |
|
|
| (1,038 | ) |
| (0.4%) |
| ||||||||||||||||||
Total costs and expenses |
|
| 249,878 |
|
| 98.9% |
|
|
| 249,047 |
|
| 101.6% |
|
|
| 285,151 |
|
| 108.2% |
|
|
| 249,878 |
|
| 98.9% |
| ||||
Income (loss) before income taxes |
|
| 2,758 |
|
| 1.1% |
|
|
| (3,837 | ) |
| (1.6%) |
| ||||||||||||||||||
Income tax benefit |
|
| (1,466 | ) |
| (0.6%) |
|
|
| (8,672 | ) |
| (3.5%) |
| ||||||||||||||||||
Net income |
|
| 4,224 |
|
| 1.7% |
|
|
| 4,835 |
|
| 2.0% |
| ||||||||||||||||||
Net income attributable to noncontrolling interests |
|
| 93 |
|
| 0.0% |
|
|
| 107 |
|
| 0.0% |
| ||||||||||||||||||
Net income attributable to shareholders |
|
| 4,131 |
|
| 1.6% |
|
|
| 4,728 |
|
| 1.9% |
| ||||||||||||||||||
(Loss) income before income taxes |
|
| (21,522 | ) |
| (8.2%) |
|
|
| 2,758 |
|
| 1.1% |
| ||||||||||||||||||
Income tax (benefit) expense |
|
| (1,745 | ) |
| (0.7%) |
|
|
| (1,466 | ) |
| (0.6%) |
| ||||||||||||||||||
Net (loss) income |
|
| (19,777 | ) |
| (7.5%) |
|
|
| 4,224 |
|
| 1.7% |
| ||||||||||||||||||
Net (loss) income attributable to noncontrolling interests |
|
| (357 | ) |
| (0.1%) |
|
|
| 93 |
|
| 0.1% |
| ||||||||||||||||||
Net (loss) income attributable to shareholders |
|
| (19,420 | ) |
| (7.4%) |
|
|
| 4,131 |
|
| 1.6% |
| ||||||||||||||||||
Participating securities' share in earnings |
|
| (655 | ) |
| (0.3%) |
|
|
| (388 | ) |
| (0.2%) |
|
|
| (50 | ) |
| (0.0%) |
|
|
| (655 | ) |
| (0.2%) |
| ||||
Dividends declared on convertible preferred stock |
|
| (656 | ) |
| (0.3%) |
|
|
| (656 | ) |
| (0.3%) |
|
|
| - |
|
| 0.0% |
|
|
| (656 | ) |
| (0.3%) |
| ||||
Amortization of discount on convertible preferred stock |
|
| (745 | ) |
| (0.3%) |
|
|
| (745 | ) |
| (0.3%) |
|
|
| - |
|
| 0.0% |
|
|
| (745 | ) |
| (0.3%) |
| ||||
Net income attributable to common shareholders |
| $ | 2,075 |
|
| 0.8% |
|
| $ | 2,939 |
|
| 1.2% |
| ||||||||||||||||||
Net (loss) income attributable to common shareholders |
| $ | (19,470 | ) |
| (7.4%) |
|
| $ | 2,075 |
|
| 0.8% |
|
The following tables set forth, for the three months ended September 30, 2019 and 2018, and 2017, revenues, and Adjusted EBITDA and net (loss) income of our reportable segments:
|
| Three Months Ended September 30, 2018 |
| |||||||||||||||||||||
(Thousands) |
| Leasing |
|
| Fiber Infrastructure |
|
| Towers |
|
| Consumer CLEC |
|
| Corporate |
|
| Subtotal of Reportable Segments |
| ||||||
Revenues |
| $ | 174,822 |
|
| $ | 70,130 |
|
| $ | 4,319 |
|
| $ | 3,365 |
|
| $ | - |
|
| $ | 252,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
| $ | 174,123 |
|
| $ | 28,480 |
|
| $ | 1,213 |
|
| $ | 765 |
|
| $ | (5,421 | ) |
| $ | 199,160 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 80,406 |
|
Depreciation and amortization |
|
| 83,857 |
|
|
| 26,605 |
|
|
| 1,734 |
|
|
| 498 |
|
|
| 54 |
|
|
| 112,748 |
|
Other income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1,038 | ) |
Transaction related costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2,323 |
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1,963 |
|
Income tax benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1,466 | ) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 4,224 |
|
|
| Three Months Ended September 30, 2019 |
| |||||||||||||||||||||
(Thousands) |
| Leasing |
|
| Fiber Infrastructure |
|
| Towers |
|
| Consumer CLEC |
|
| Corporate |
|
| Subtotal of Reportable Segments |
| ||||||
Revenues |
| $ | 179,648 |
|
| $ | 77,979 |
|
| $ | 3,273 |
|
| $ | 2,729 |
|
| $ | - |
|
| $ | 263,629 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
| $ | 178,095 |
|
| $ | 30,536 |
|
| $ | (417 | ) |
| $ | 465 |
|
| $ | (6,021 | ) |
| $ | 202,658 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 104,655 |
|
Depreciation and amortization |
|
| 70,227 |
|
|
| 28,652 |
|
|
| 1,643 |
|
|
| 594 |
|
|
| 50 |
|
|
| 101,166 |
|
Other expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 540 |
|
Transaction related and other costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 15,179 |
|
Gain on sale of real estate |
|
| (131 | ) |
|
| - |
|
|
| (74 | ) |
|
| - |
|
|
| - |
|
|
| (205 | ) |
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2,845 |
|
Income tax benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1,745 | ) |
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | (19,777 | ) |
33
45
| Three Months Ended September 30, 2017 |
|
| Three Months Ended September 30, 2018 |
| |||||||||||||||||||||||||||||||||||||||||||
(Thousands) |
| Leasing |
|
| Fiber Infrastructure |
|
| Towers |
|
| Consumer CLEC |
|
| Corporate |
|
| Subtotal of Reportable Segments |
|
| Leasing |
|
| Fiber Infrastructure |
|
| Towers |
|
| Consumer CLEC |
|
| Corporate |
|
| Subtotal of Reportable Segments |
| ||||||||||||
Revenues |
| $ | 171,673 |
|
| $ | 66,363 |
|
| $ | 2,796 |
|
|
| 4,378 |
|
| $ | - |
|
| $ | 245,210 |
|
| $ | 174,822 |
|
| $ | 70,130 |
|
| $ | 4,319 |
|
|
| 3,365 |
|
| $ | - |
|
| $ | 252,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
| $ | 171,215 |
|
| $ | 28,348 |
|
| $ | (98 | ) |
| $ | 1,025 |
|
| $ | (5,552 | ) |
| $ | 194,938 |
|
| $ | 174,123 |
|
| $ | 28,480 |
|
| $ | 1,213 |
|
| $ | 765 |
|
| $ | (5,421 | ) |
| $ | 199,160 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 78,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 80,406 |
|
Depreciation and amortization |
|
| 87,320 |
|
|
| 24,050 |
|
|
| 1,326 |
|
|
| 652 |
|
|
| 96 |
|
|
| 113,444 |
|
|
| 83,857 |
|
|
| 26,605 |
|
|
| 1,734 |
|
|
| 498 |
|
|
| 54 |
|
|
| 112,748 |
|
Other income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (3,933 | ) | ||||||||||||||||||||||||
Transaction related costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 8,512 |
| ||||||||||||||||||||||||
Other income, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1,038 | ) | ||||||||||||||||||||||||
Transaction related and other costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2,323 |
| ||||||||||||||||||||||||
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1,968 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1,963 |
|
Income tax benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (8,672 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1,466 | ) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 4,835 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 4,224 |
|
Revenues
Leasing - Leasing revenues are primarily attributable to rental revenue from leasing theour Distribution Systems to Windstream Holdings pursuant to the Master Lease. Under the Master Lease, Windstream Holdings 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, as Windstream makes direct payments to the taxing authorities. The Master Lease has an initial term of 15 years with four 5-year renewal options and encompasses properties located in 29 states. Annual cash rent under the Master Lease is currently $657 million and is subject to an annual escalation of 0.5% each May through the initial term.
We adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases (“ASC 842”) as of January 1, 2019. This standard supersedes prior guidance regarding the evaluation of collectability of lease receivables, including straight-line revenue receivables. We have evaluated the collectability of our straight-line revenue receivable associated with the Master Lease in accordance with ASC 842. At the date of adoption, due to uncertainties surrounding Windstream’s operations and liquidity, including uncertainties surrounding the outcome of Windstream’s pending litigation, we concluded that the receivable should be written off. As a result, effective January 1, 2019, the Master Lease will be accounted for on a cash basis in accordance with ASC 842, until a time at which there is more certainty regarding Windstream’s decision to assume or reject the Master Lease.
The Master Lease provides that tenant funded capital improvements (“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.
For the three months ended September 30, 2019, we recognized $172.5 million of revenue from rents under the Master Lease, which included $7.5 million of TCI revenue. For the three months ended September 30, 2018, we recognized $173.7 million of revenue from rents under the Master Lease, which included $3.5 million of straight-line revenues and $6.0 million of TCI revenue. For the three months ended September 30, 2017, we recognized $171.7 million of revenues from the Master Lease, which included $4.3 million of straight-line rent revenue, and $4.0 million of TCI revenue. The increase in TCI revenue is attributable to increasedcontinued investment by Windstream in TCIs. Windstream invested $31.8$41.4 million in TCIs during the three months ended September 30, 2018, a decrease from $52.5 million it2019, bringing the total amount invested in TCIs during the three months ended September 30, 2017. Sinceby Windstream since the inception of the Master Lease to $729.7 million as of September 30, 2019. As of September 30, 2018, Windstream hashad invested a total of $577.5 million in such improvements.
Because a substantial portion of our revenue and cash flows are derived from lease payments by Windstream pursuant to the Master Lease, there could be a material adverse impact on our consolidated results of operations, liquidity, financial condition and/or ability to pay dividendsmaintain our status as a REIT and service debt if Windstream were to reject the Master Lease in bankruptcy, default under the Master Lease, succeed in its claims against us or otherwise experiences operating or liquidity difficulties and becomes unable to generate sufficient cash to make payments to us. In recent years, Windstream has experienced annual declines in its total revenue, sales and cash flow, and has had its credit ratings downgraded by nationally recognized credit rating agencies multiple times over the past
46
12 months and, as recently as June 2018. In addition, on February 25, 2019, filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York. See Part I, Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2018 for additional information concerning the impact Windstream’s bankruptcy and related claims may have on our REIT status, operations and financial condition.
Windstream is involved in litigation with an entity who acquired certain Windstream debt securitiesa publicly traded company and thereafter issued a notice of default under such securities relatingis subject to the Spin-Off. On December 7, 2017, the entity issued a notice of acceleration to Windstream claiming that the alleged default had matured into an “event of default” and that the principal amount, along with accrued interest, of such securities was due and payable immediately. Windstream challenged the matter in federal court and a trial was held in July 2018. Asperiodic filing requirements of the dateSecurities Exchange Act of 1934, as amended. Windstream filings can be found at www.sec.gov. Windstream filings are not incorporated by reference in this quarterly report, a verdict has not been issued. If Windstream receives an adverse ruling (andQuarterly Report on Form 10-Q.
For the ruling is not stayed or becomes finalthree months ended September 30, 2019, we recognized $7.2 million of leasing revenues from non-Windstream triple-net leasing and unappealable), an actual “eventdark fiber indefeasible rights of default” would result. An actual “eventuse (“IRU”) arrangements, including $1.8 million of default” would trigger cross-default provisions in Windstream’s other debt instruments, including Windstream Services’ existing credit facility and all of its other notes, which, in turn, would trigger a default under the Master Lease. In addition, Windstream is dependent upon distributions from its subsidiaries to fund its rental payments, and its subsidiaries’ debt instruments generally prohibit such distributions upon any event of default. If an adverse outcome occurs with respect to this matter and Windstream does not have the ability and/or intent to pay under the Master Lease, there could be a material adverse impact to us.
34
We monitor the credit quality of Windstream through numerous methods, including by (i) reviewing the credit ratings of Windstream by nationally recognized credit rating agencies, (ii) reviewing the financial statements of Windstream that are publicly available and that are required to be delivered to us pursuantrevenue related to the Master Lease, (iii) monitoring ongoing litigation and news reports regarding Windstream and its businesses, (iv) conducting research to ascertain industry trends potentially affecting Windstream, and (v) monitoring the timeliness of its lease payments. In addition to periodic financial statements, Windstream is obligated under the Master Lease to provide us (i) a detailed consolidated budgetBluebird transaction that closed on an annual basis and any significant revisions approved by Windstream’s board of directors, (ii) prompt notice of any adverse action or investigation by a governmental authority relating to Windstream’s licenses affecting the leased property, and (iii) any information we require to comply with our reporting and filing obligations with the SEC. Furthermore, pursuant to the Master Lease, we may inspect the properties leased to Windstream upon reasonable advance notice, and, no more than twice per year, we may require Windstream to deliver an officer’s certificate certifying, among other things, its material compliance with the covenants under the Master Lease, the amount of rent and additional charges payable thereunder, the dates the same were paid, and any other questions or statements of fact we reasonably request.
August 30, 2019. For the three months ended September 30, 2018, we recognized $1.1 million of leasing revenues from non-Windstream triple-net leasing and dark fiber IRU arrangements. No suchThe increase in non-Windstream related revenues were recognized foris due to the three months ended September 30, 2017.timing of closing sale-leaseback transactions.
At September 30, 2018, Uniti Leasing had 4.1 million fiber strand miles, of which 3.6 million fiber strand miles were under long-term exclusive triple-net leases.
Fiber Infrastructure – For the three months ended September 30, 2018 and 2017, we recognized $70.1 million and $66.4 million of revenue, respectively, in our Fiber Infrastructure segment. Fiber Infrastructure revenues for the three months ended September 30, 20182019 and 20172018 consisted of the following:
|
| Three Months Ended September 30, |
|
| Three Months Ended September 30, |
| ||||||||||||||||||||||||||
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
| ||||||||||||||||||||
(Thousands) |
| Amount |
|
| % of Segment Revenues |
|
| Amount |
|
| % of Segment Revenues |
|
| Amount |
|
| % of Segment Revenues |
|
| Amount |
|
| % of Segment Revenues |
| ||||||||
Fiber Infrastructure revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lit backhaul services |
| $ | 32,920 |
|
| 46.9% |
|
| $ | 35,108 |
|
| 52.9% |
|
| $ | 31,449 |
|
| 40.3% |
|
| $ | 32,920 |
|
| 46.9% |
| ||||
Enterprise and wholesale |
|
| 16,052 |
|
| 22.9% |
|
|
| 14,471 |
|
| 21.8% |
|
|
| 21,591 |
|
| 27.7% |
|
|
| 16,052 |
|
| 22.9% |
| ||||
E-Rate and government |
|
| 16,463 |
|
| 23.5% |
|
|
| 15,101 |
|
| 22.8% |
|
|
| 18,879 |
|
| 24.2% |
|
|
| 16,463 |
|
| 23.5% |
| ||||
Dark fiber and small cells |
|
| 3,808 |
|
| 5.4% |
|
|
| 1,702 |
|
| 2.5% |
|
|
| 5,585 |
|
| 7.2% |
|
|
| 3,808 |
|
| 5.4% |
| ||||
Other services |
|
| 887 |
|
| 1.3% |
|
|
| (19 | ) |
| (0.0%) |
|
|
| 475 |
|
| 0.6% |
|
|
| 887 |
|
| 1.3% |
| ||||
Total Fiber Infrastructure revenues |
| $ | 70,130 |
|
| 100.0% |
|
| $ | 66,363 |
|
| 100.0% |
|
| $ | 77,979 |
|
| 100.0% |
|
| $ | 70,130 |
|
| 100.0% |
|
For the three months ended September 30, 2019, Fiber Infrastructure revenues totaled $78.0 million as compared to $70.1 million for the three months ended September 30, 2018. The increase is primarily driven by the timing of the Information Transport Solutions, Inc. (“ITS”) acquisition that occurred on October 19, 2018, which contributed revenues of $7.6 million during the three months ended September 30, 2019.
At September 30, 2018,2019, we had approximately 18,05719,846 customer connections, up from 16,32418,057 customer connections at September 30, 2017.2018.
Towers – The Uniti Towers portfolio consists of wireless communications towers across the Eastern and Central regions in the United States, and Latin America. Summarized geographical wireless tower information related to the Uniti Towers portfolio as of September 30, 2018 and 2017 is as follows:
|
| As of September 30, |
| |||||
|
| 2018 |
|
| 2017 |
| ||
Towers: |
|
|
|
|
|
|
|
|
United States |
|
| 352 |
|
|
| 220 |
|
Latin America |
|
| 495 |
|
|
| 432 |
|
Total |
|
| 847 |
|
|
| 652 |
|
Towers revenues for the three months ended September 30, 20182019 and 20172018 consisted of the following:
35
| Three Months Ended September 30, |
|
| Three Months Ended September 30, |
| |||||||||||||||||||||||||||
(Thousands) |
| 2018 |
|
| % of Total |
|
| 2017 |
|
| % of Total |
|
| 2019 |
|
| % of Total |
|
| 2018 |
|
| % of Total |
| ||||||||
Towers revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
| $ | 1,849 |
|
| 42.8% |
|
| $ | 521 |
|
| 18.6% |
|
| $ | 3,273 |
|
| 100.0% |
|
| $ | 1,849 |
|
| 42.8% |
| ||||
Latin America |
|
| 2,470 |
|
| 57.2% |
|
|
| 2,275 |
|
| 81.4% |
|
|
| - |
|
| 0.0% |
|
|
| 2,470 |
|
| 57.2% |
| ||||
Total |
| $ | 4,319 |
|
| 100.0% |
|
| $ | 2,796 |
|
| 100.0% |
|
| $ | 3,273 |
|
| 100.0% |
|
| $ | 4,319 |
|
| 100.0% |
|
The increase in revenueU.S. revenues for the three months ended September 30, 2018,2019, compared to the three months ended September 30, 2017,2018, is primarily driven by our development activitiesactivities. For three months ended September 30, 2019, we completed the construction of 55 towers in the U.S. At September 30, 2019, the Uniti Towers’ domestic portfolio consisted of 628 wireless communications towers located in 32 states across the eastern and central regions in the United States.States, an increase from 352 wireless communications towers at September 30, 2018. The decrease in revenues in Latin America compared to the three months ended September 30, 2018 is due to the April 2, 2019 sale of our Latin American tower portfolio.
Consumer CLEC – For the three months ended September 30, 2018,2019, we recognized $3.4$2.7 million of revenue from the Consumer CLEC Business, compared to $4.4$3.4 million for the three months ended September 30, 2017.2018. The decrease is primarily attributable to a loss of
47
customers during the period. We served approximately 17,500 customers as of September 30, 2019, a 26% decrease from the approximately 23,700 customers served at September 30, 2018. The decrease in customers is due to the effects of competition and customer attrition,attrition. We have commenced a wind down of our Consumer CLEC business, which includes customer terminations. We anticipate seeing an acceleration of the decline in revenue as we served 23,674 customers asa result of September 30, 2018, a 25.1% decrease from 31,590 customers served at September 30, 2017.these efforts. We estimate that the wind down will be completed during the second quarter of 2020.
Interest Expense
Interest expense for the three months ended September 30, 2019 totaled $104.7 million, which includes non-cash interest expense of $12.5 million resulting from the amortization of our debt discounts and debt issuance costs. Interest expense for the three months ended September 30, 2018, totaled $80.4 million, which includes non-cash interest expense of $6.2 million resulting from the amortization of our debt discounts and debt issuance costs. Interest
The increase is primarily related to an increase in interest expense forof $10.2 million on the three months ended September 30, 2017 totaled $78.8Term Loan Facility as a result of the Fourth Amendment to our Credit Agreement, which increased the rate of our term loans by 200 basis points effective March 18, 2019, an increase of $3.5 million of cash interest expense incurred on our 4.0% Exchangeable Notes issued June 28, 2019, and an increase in of interest expense of $3.5 million on the Revolving Credit Facility as a result of the Fifth Amendment to our credit agreement, which includesincreased the rate by 200 basis points effective June 24, 2019. Furthermore, there was an increase in non-cash interest expense of $6.1 million resulting from the amortization of our debt discounts and debt issuance costs. The increase iscosts of $6.3 million related to an increasethe issues of interest expense incurred on the revolving credit facilityExchangeable Notes and as a result of $3.3 million due to increased borrowings and LIBOR rates compared to the prior year, partially offset by a decrease in interest expense related to capitalized interest of $1.4 million, which was not incurred in the three months ended September 30, 2017.Fourth Amendment.
Depreciation and Amortization Expense
We incur depreciation and amortization expense related to our property, plant and equipment, corporate assets and intangible assets. Charges for depreciation and amortization for the three months ended September 30, 2019 totaled $101.2 million, which included property, plant and equipment depreciation of $94.9 million and intangible asset amortization of $6.3 million. Charges for depreciation and amortization for the three months ended September 30, 2018 totaled $112.7 million, (44.6% of revenue), which included property, plant and equipment depreciation of $106.4 million and intangible asset amortization of $6.3 million. Charges for depreciation and amortization for the three months ended September 30, 2017 totaled $113.4 million (46.3% of revenue), which included property, plant and equipment depreciation of $107.1 million and intangible asset amortization of $6.3 million.
General and Administrative Expense
General and administrative expenses include compensation costs, including stock-based compensation awards, professional and legal services, corporate office costs and other costs associated with administrative activities. For the three months ended September 30, 2019, general and administrative costs totaled $25.3 million, which includes $2.8 million of stock-based compensation and $0.7 million of general and administrative costs attributable to the timing of the acquisition of ITS that occurred on October 19, 2018. For the three months ended September 30, 2018, general and administrative costs totaled $20.7 million, (8.2%which included $2.0 million of revenue), compared to $22.1 million (9.0% of revenue) for the three months ended September 30, 2017. The decrease is primarily driven by a $1.7 million decrease instock-based compensation costs in our Fiber Infrastructure segment as a result of our integration efforts.expense.
Operating Expense
Operating expense for the three months ended September 30, 2018,2019, totaled $34.8$39.9 million (13.8% of revenue) compared to $30.2$34.8 million (12.3% of revenue) for the three months ended September 30, 2017.2018, which was attributable to the increase in Fiber Infrastructure operating expenses and expenses associated with our U.S. towers development activities. Operating expense for our reportable segments for the three months ended September 30, 20182019 and 20172018 consisted of the following:
|
| Three Months Ended September 30, |
| |||||||||||||
|
| 2019 |
|
| 2018 |
| ||||||||||
(Thousands) |
| Amount |
|
| % of Consolidated Revenues |
|
| Amount |
|
| % of Consolidated Revenues |
| ||||
Operating expenses by segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiber Infrastructure |
| $ | 34,504 |
|
| 13.1% |
|
| $ | 30,165 |
|
| 12.0% |
| ||
Towers |
|
| 2,764 |
|
| 1.1% |
|
|
| 1,752 |
|
| 0.7% |
| ||
CLEC |
|
| 2,194 |
|
| 0.8% |
|
|
| 2,600 |
|
| 1.0% |
| ||
Leasing |
|
| 486 |
|
| 0.2% |
|
|
| 256 |
|
| 0.1% |
| ||
Total operating expenses |
| $ | 39,948 |
|
| 15.2% |
|
| $ | 34,773 |
|
| 13.8% |
|
3648
| Three Months Ended September 30, |
| ||||||||||||||
|
| 2018 |
|
| 2017 |
| ||||||||||
(Thousands) |
| Amount |
|
| % of Consolidated Revenues |
|
| Amount |
|
| % of Consolidated Revenues |
| ||||
Operating expenses by segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiber Infrastructure |
| $ | 30,165 |
|
| 12.0% |
|
| $ | 25,406 |
|
| 10.3% |
| ||
Towers |
|
| 1,752 |
|
| 0.7% |
|
|
| 1,411 |
|
| 0.6% |
| ||
CLEC |
|
| 2,600 |
|
| 1.0% |
|
|
| 3,355 |
|
| 1.4% |
| ||
Leasing |
|
| 256 |
|
| 0.1% |
|
|
| - |
|
| 0.0% |
| ||
Total operating expenses |
| $ | 34,773 |
|
| 13.8% |
|
| $ | 30,172 |
|
| 12.3% |
|
Fiber Infrastructure – For the three months ended September 30, 2018,2019, Fiber Infrastructure operating expenses totaled $30.2$34.5 million as compared to $25.4$30.2 million for the three months ended September 30, 2017.2018. Operating expense consists of network related costs, such as dark fiber and tower rents, and lit service and maintenance expense. In addition, costs associated with our construction activities are presented within operating expenses. The increase in operating expenses is primarily attributable to an increase in network costs, specifically lit service expense as well an increase in construction costs.the timing of the ITS acquisition that occurred on October 19, 2018, which incurred operating expenses of 6.4 million for the three months ended September 30, 2019.
Towers – Our Towers segment operating expense primarily consists of ground rent, some or all of which may be passed to our tenants, as well as property taxes, regulatory fees and maintenance and repairs. For the three months ended September 30, 2018, Towers operating expense included $1.4 million of ground rent expense, compared to $0.9repairs expenses. Operating expenses were $2.8 million for the three months ended September 30, 2017. 2019 and related entirely to our U.S. towers operations, compared to $1.8 million for the three months ended September 30, 2018, which consisted of $0.7 million of expenses related to our U.S. towers operations, and $1.1 million related to our Latin America operations.
The changeincrease in expenses attributable to our U.S. towers operations is a result of an increased in our development activities. At September 30, 2019 we operated 628 towers, compared to 352 at September 30, 2018. U.S. ground rent expenses increased by $0.7 million for the three months ended September 30, 2019 as compared to the three months ended September 30, 2018. In addition, there was an increase in property tax expense of $0.3 million and an increase in cancelled site costs of $0.5 million for the three months ended September 30, 2019 compared to the three months ended September 30, 2018. The decrease in expense related to Latin American is attributable to an increase in completed towers at September 30, 2018 from September 30, 2017, driven by our development activity in the United States.April 2, 2019 sale of the Latin American tower business.
Consumer CLEC – Expense associated with the Consumer CLEC Business is primarily attributable to the Wholesale Agreement and the Master Services Agreement entered into between us and Windstream in connection with the Spin-Off, and includedincludes costs arising under the interconnection agreements with other telecommunication carriers. Expense associated with the Wholesale Agreement and Master Services Agreement for the three months ended September 30, 20182019 totaled $1.9$1.5 million (0.7% of revenue) and $0.2 million, (0.1% of revenue), respectively, and expense associated with the Wholesale Agreement and the Master Services Agreement for the three months ended September 30, 20172018 totaled $2.5$1.9 million (1.0%and $0.2 million, respectively. The decrease in expense is a direct result of revenue)a decrease in customers served, as these expenses are largely variable in nature.
Transaction Related and $0.3Other Costs
Transaction costs included incremental acquisition, pursuit, transaction and integration costs, including unsuccessful acquisition pursuit costs. In addition, these costs include costs incurred as a result of Windstream’s bankruptcy filing, costs associated with Windstream’s claims against us and costs associated with the implementation of our new enterprise resource planning system. For the three months ended September 30, 2019, we incurred $15.2 million (0.1% of revenue), respectively.transaction related costs, compared to $2.3 million of such costs during the three months ended September 30, 2018. The increase is primarily related to $12.3 million of total costs associated with the non-capitalizable Bluebird asset acquisition expenses, sale of our Latin America Tower portfolio, costs related to the Windstream bankruptcy, and costs associated with the implementation of our enterprise resource planning system.
Other Income Tax (Benefit) Expense
We recognized in otherrecorded a $1.7 million income a realized gain of $0.8 million in connection with an escrow settlement related to our Latin American operations and a $0.2 million unrealized gain for mark-to-market adjustments on our contingent consideration arrangementstax benefit for the three months ended September 30, 2018, compared2019. This is primarily driven by a $3.2 million income tax benefit related to a $3.9pre-tax loss in our Fiber Infrastructure segment, partially offset by approximately $1.3 million unrealized gain for mark-to-market adjustments on our contingent consideration arrangements for the three months ended September 30, 2017. The fair value of the contingent consideration arrangement connected to the July 3, 2017 acquisition of Hunt is determined using the closing price of our common shares in the active market, while the fair value of the contingent consideration arrangement in connection with the August 31, 2016 acquisition of Tower Cloud is determined using a discounted cash flow model and probability adjusted estimates of the future operational milestones.
Income Tax Benefit
income tax expense resulting from undistributed REIT taxable income. We recorded a $1.5 million income tax benefit for the three months ended September 30, 2018, primarily driven by pre-tax loss in our Fiber Infrastructure segment. We recorded an $8.7 million benefit in income tax benefit for the three months ended September 30, 2017, primarily as a result of an $8.0 million income tax benefit we recorded related to the release of a valuation allowance due to the closing of the Southern Light transaction. The Southern Light transaction resulted in a deferred tax liability, and this future reversal of taxable temporary differences supports the realization of deferred tax assets which previously had a valuation allowance.
Comparison of the nine months ended September 30, 20182019 and 20172018
The following table sets forth, for the periods indicated, our results of operations expressed as dollars and as a percentage of total revenues:
3749
| Nine Months Ended September 30, |
|
| Nine Months Ended September 30, |
| |||||||||||||||||||||||||||
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
| ||||||||||||||||||||
(Thousands) |
| Amount |
|
| % of Revenues |
|
| Amount |
|
| % of Revenues |
|
| Amount |
|
| % of Revenues |
|
| Amount |
|
| % of Revenues |
| ||||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leasing |
| $ | 521,481 |
|
| 69.8% |
|
| $ | 512,893 |
|
| 76.6% |
|
| $ | 532,773 |
|
| 67.5% |
|
| $ | 521,481 |
|
| 69.8% |
| ||||
Fiber Infrastructure |
|
| 204,486 |
|
| 27.4% |
|
|
| 136,158 |
|
| 20.3% |
|
|
| 236,139 |
|
| 29.9% |
|
|
| 204,486 |
|
| 27.4% |
| ||||
Tower |
|
| 10,161 |
|
| 1.4% |
|
|
| 6,679 |
|
| 1.0% |
|
|
| 11,499 |
|
| 1.5% |
|
|
| 10,161 |
|
| 1.4% |
| ||||
Consumer CLEC |
|
| 10,752 |
|
| 1.4% |
|
|
| 13,966 |
|
| 2.1% |
|
|
| 8,663 |
|
| 1.1% |
|
|
| 10,752 |
|
| 1.4% |
| ||||
Total revenues |
|
| 746,880 |
|
| 100.0% |
|
|
| 669,696 |
|
| 100.0% |
|
|
| 789,074 |
|
| 100.0% |
|
|
| 746,880 |
|
| 100.0% |
| ||||
Costs and Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
| 237,398 |
|
| 31.8% |
|
|
| 227,235 |
|
| 33.9% |
|
|
| 286,842 |
|
| 36.4% |
|
|
| 237,398 |
|
| 31.8% |
| ||||
Depreciation and amortization |
|
| 342,311 |
|
| 45.8% |
|
|
| 317,404 |
|
| 47.4% |
|
|
| 307,571 |
|
| 39.0% |
|
|
| 342,311 |
|
| 45.8% |
| ||||
General and administrative expense |
|
| 63,867 |
|
| 8.6% |
|
|
| 49,549 |
|
| 7.4% |
|
|
| 75,921 |
|
| 9.6% |
|
|
| 63,867 |
|
| 8.6% |
| ||||
Operating expense |
|
| 96,199 |
|
| 12.9% |
|
|
| 74,258 |
|
| 11.1% |
|
|
| 118,529 |
|
| 15.0% |
|
|
| 96,199 |
|
| 12.9% |
| ||||
Transaction related costs |
|
| 12,025 |
|
| 1.6% |
|
|
| 32,213 |
|
| 4.8% |
| ||||||||||||||||||
Transaction related and other costs |
|
| 28,883 |
|
| 3.7% |
|
|
| 12,025 |
|
| 1.6% |
| ||||||||||||||||||
Gain on sale of real estate |
|
| (28,995 | ) |
| (3.7%) |
|
|
| - |
|
|
| - |
| |||||||||||||||||
Other (income) expense |
|
| (1,574 | ) |
| (0.2%) |
|
|
| 9,638 |
|
| 1.4% |
|
|
| (32,091 | ) |
| (4.1%) |
|
|
| (1,574 | ) |
| (0.2%) |
| ||||
Total costs and expenses |
|
| 750,226 |
|
| 100.5% |
|
|
| 710,297 |
|
| 106.1% |
|
|
| 756,660 |
|
| 95.9% |
|
|
| 750,226 |
|
| 100.5% |
| ||||
Loss before income taxes |
|
| (3,346 | ) |
| (0.5%) |
|
|
| (40,601 | ) |
| (6.1%) |
| ||||||||||||||||||
Income tax benefit |
|
| (5,208 | ) |
| (0.7%) |
|
|
| (8,976 | ) |
| (1.3%) |
| ||||||||||||||||||
Net income (loss) |
|
| 1,862 |
|
| 0.2% |
|
|
| (31,625 | ) |
| (4.7%) |
| ||||||||||||||||||
Income (loss) before income taxes |
|
| 32,414 |
|
| 4.1% |
|
|
| (3,346 | ) |
| (0.5%) |
| ||||||||||||||||||
Income tax expense (benefit) |
|
| 10,152 |
|
| 1.3% |
|
|
| (5,208 | ) |
| (0.7%) |
| ||||||||||||||||||
Net income |
|
| 22,262 |
|
| 2.8% |
|
|
| 1,862 |
|
| 0.2% |
| ||||||||||||||||||
Net income attributable to noncontrolling interests |
|
| 24 |
|
| 0.0% |
|
|
| 107 |
|
| 0.0% |
|
|
| 523 |
|
| (0.0%) |
|
|
| 24 |
|
| 0.0% |
| ||||
Net income (loss) attributable to shareholders |
|
| 1,838 |
|
| 0.2% |
|
|
| (31,732 | ) |
| (4.7%) |
| ||||||||||||||||||
Net income attributable to shareholders |
|
| 21,739 |
|
| 2.8% |
|
|
| 1,838 |
|
| 0.2% |
| ||||||||||||||||||
Participating securities' share in earnings |
|
| (1,992 | ) |
| (0.2%) |
|
|
| (1,156 | ) |
| (0.2%) |
|
|
| (301 | ) |
| (0.0%) |
|
|
| (1,992 | ) |
| (0.3%) |
| ||||
Dividends declared on convertible preferred stock |
|
| (1,968 | ) |
| (0.3%) |
|
|
| (1,968 | ) |
| (0.3%) |
|
|
| (656 | ) |
| (0.1%) |
|
|
| (1,968 | ) |
| (0.2%) |
| ||||
Amortization of discount on convertible preferred stock |
|
| (2,235 | ) |
| (0.3%) |
|
|
| (2,235 | ) |
| (0.3%) |
|
|
| (993 | ) |
| (0.2%) |
|
|
| (2,235 | ) |
| (0.3%) |
| ||||
Net loss attributable to common shareholders |
| $ | (4,357 | ) |
| (0.6%) |
|
| $ | (37,091 | ) |
| (5.5%) |
| ||||||||||||||||||
Net income (loss) attributable to common shareholders |
| $ | 19,789 |
|
| 2.5% |
|
| $ | (4,357 | ) |
| (0.6%) |
|
The following tables set forth, for the nine months ended September 30, 2019 and 2018, and 2017, revenues, and Adjusted EBITDA and net income of our reportable segments:
|
| Nine Months Ended September 30, 2018 |
| |||||||||||||||||||||
(Thousands) |
| Leasing |
|
| Fiber Infrastructure |
|
| Towers |
|
| Consumer CLEC |
|
| Corporate |
|
| Subtotal of Reportable Segments |
| ||||||
Revenues |
| $ | 521,481 |
|
| $ | 204,486 |
|
| $ | 10,161 |
|
| $ | 10,752 |
|
| $ | - |
|
| $ | 746,880 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
| $ | 519,848 |
|
| $ | 87,080 |
|
| $ | (417 | ) |
| $ | 2,606 |
|
| $ | (16,245 | ) |
| $ | 592,872 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 237,398 |
|
Depreciation and amortization |
|
| 257,055 |
|
|
| 78,754 |
|
|
| 4,786 |
|
|
| 1,495 |
|
|
| 221 |
|
|
| 342,311 |
|
Other income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1,574 | ) |
Transaction related costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 12,025 |
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 6,058 |
|
Income tax benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (5,208 | ) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 1,862 |
|
|
| Nine Months Ended September 30, 2019 |
| |||||||||||||||||||||
(Thousands) |
| Leasing |
|
| Fiber Infrastructure |
|
| Towers |
|
| Consumer CLEC |
|
| Corporate |
|
| Subtotal of Reportable Segments |
| ||||||
Revenues |
| $ | 532,773 |
|
| $ | 236,139 |
|
| $ | 11,499 |
|
| $ | 8,663 |
|
| $ | - |
|
| $ | 789,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
| $ | 528,727 |
|
| $ | 97,572 |
|
| $ | (134 | ) |
| $ | 1,676 |
|
| $ | (18,044 | ) |
| $ | 609,797 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 286,842 |
|
Depreciation and amortization |
|
| 216,254 |
|
|
| 85,405 |
|
|
| 4,470 |
|
|
| 1,286 |
|
|
| 156 |
|
|
| 307,571 |
|
Other income, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (24,848 | ) |
Transaction related and other costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 28,883 |
|
Gain on sale of real estate |
|
| (5,091 | ) |
|
| - |
|
|
| (23,904 | ) |
|
| - |
|
|
| - |
|
|
| (28,995 | ) |
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 7,930 |
|
Income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 10,152 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 22,262 |
|
38
50
| Nine Months Ended September 30, 2017 |
|
| Nine Months Ended September 30, 2018 |
| |||||||||||||||||||||||||||||||||||||||||||
(Thousands) |
| Leasing |
|
| Fiber Infrastructure |
|
| Towers |
|
| Consumer CLEC |
|
| Corporate |
|
| Subtotal of Reportable Segments |
|
| Leasing |
|
| Fiber Infrastructure |
|
| Towers |
|
| Consumer CLEC |
|
| Corporate |
|
| Subtotal of Reportable Segments |
| ||||||||||||
Revenues |
| $ | 512,893 |
|
| $ | 136,158 |
|
| $ | 6,679 |
|
|
| 13,966 |
|
| $ | - |
|
| $ | 669,696 |
|
| $ | 521,481 |
|
| $ | 204,486 |
|
| $ | 10,161 |
|
| $ | 10,752 |
|
| $ | - |
|
| $ | 746,880 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
| $ | 511,803 |
|
| $ | 52,533 |
|
| $ | (1,075 | ) |
| $ | 3,514 |
|
| $ | (15,265 | ) |
| $ | 551,510 |
|
| $ | 519,848 |
|
| $ | 87,080 |
|
| $ | (417 | ) |
| $ | 2,606 |
|
| $ | (16,245 | ) |
| $ | 592,872 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 227,235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 237,398 |
|
Depreciation and amortization |
|
| 261,037 |
|
|
| 50,618 |
|
|
| 3,505 |
|
|
| 1,955 |
|
|
| 289 |
|
|
| 317,404 |
|
|
| 257,055 |
|
|
| 78,754 |
|
|
| 4,786 |
|
|
| 1,495 |
|
|
| 221 |
|
|
| 342,311 |
|
Other expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 9,638 |
| ||||||||||||||||||||||||
Transaction related costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 32,213 |
| ||||||||||||||||||||||||
Other income, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1,574 | ) | ||||||||||||||||||||||||
Transaction related and other costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 12,025 |
| ||||||||||||||||||||||||
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 5,621 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 6,058 |
|
Income tax benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (8,976 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (5,208 | ) |
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | (31,625 | ) | ||||||||||||||||||||||||
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 1,862 |
|
Revenues
Leasing – Leasing revenues are primarily attributable to rentalFor the nine months ended September 30, 2019, we recognized $515.0 million of revenue from leasing the Distribution Systems to Windstream Holdings pursuant torents under the Master Lease.
Lease, which included $21.1 million of TCI revenue. For the nine months ended September 30, 2018, we recognized $519.8 million of revenue from rents under the Master Lease, which included $11.6 million of straight-line revenues and $16.7 million of TCI revenue. For the nine months ended September 30, 2017,2019, we recognized $512.9 million of revenues from the Master Lease, which included $13.0 million of straight-line rent revenue, and $9.8 million of TCI revenue. The increase in TCI revenue is attributable to increased investment by Windstream in TCIs. Windstream invested $124.0 million in TCIs during the nine months ended September 30, 2018, a decrease from $166.3 million it invested in TCIs during the nine months ended September 30, 2017.
For the nine months ended September 30, 2018, we recognized $1.6$17.8 million of leasing revenues from non-Windstream triple-net leasing arrangements. No such revenues were recognizedand dark fiber IRU arrangements, compared to $1.6 million for the nine months ended September 30, 2017.2018.
Fiber Infrastructure – For the nine months ended September 30, 20182019 and 2017,2018, we recognized $204.5$236.1 million and $136.2$204.5 million of revenue, respectively, in our Fiber Infrastructure segment. The increase to Fiber Infrastructure revenue is primarily driven by the timing of the July 3, 2017 acquisitions of Southern Light and Hunt.
Fiber Infrastructure revenues for the nine months ended September 30, 20182019 and 20172018 consisted of the following:
|
| Nine Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||||||||||
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
| ||||||||||||||||||||
(Thousands) |
| Amount |
|
| % of Segment Revenues |
|
| Amount |
|
| % of Segment Revenues |
|
| Amount |
|
| % of Segment Revenues |
|
| Amount |
|
| % of Segment Revenues |
| ||||||||
Fiber Infrastructure revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lit backhaul services |
| $ | 99,740 |
|
| 48.8% |
|
| $ | 83,656 |
|
| 61.4% |
|
| $ | 97,055 |
|
| 41.0% |
|
| $ | 99,740 |
|
| 48.8% |
| ||||
Enterprise and wholesale |
|
| 47,032 |
|
| 23.0% |
|
|
| 21,392 |
|
| 15.7% |
|
|
| 57,561 |
|
| 24.4% |
|
|
| 47,032 |
|
| 23.0% |
| ||||
E-Rate and government |
|
| 44,850 |
|
| 21.9% |
|
|
| 28,850 |
|
| 21.2% |
|
|
| 63,407 |
|
| 26.9% |
|
|
| 44,850 |
|
| 21.9% |
| ||||
Dark fiber and small cells |
|
| 10,109 |
|
| 4.9% |
|
|
| 2,557 |
|
| 1.9% |
|
|
| 15,958 |
|
| 6.8% |
|
|
| 10,109 |
|
| 4.9% |
| ||||
Other services |
|
| 2,755 |
|
| 1.4% |
|
|
| (297 | ) |
| (0.2%) |
|
|
| 2,158 |
|
| 0.9% |
|
|
| 2,755 |
|
| 1.4% |
| ||||
Total Fiber Infrastructure revenues |
| $ | 204,486 |
|
| 100.0% |
|
| $ | 136,158 |
|
| 100.0% |
|
| $ | 236,139 |
|
| 100.0% |
|
| $ | 204,486 |
|
| 100.0% |
|
At September 30, 2018,2019, we had approximately 18,05719,846 customer connections, up from 16,32418,057 customer connections at September 30, 2017.2018.
Towers – Towers revenues for the nine months ended September 30, 20182019 and 20172018 consisted of the following:
|
| Nine Months Ended September 30, |
| |||||||||||||
(Thousands) |
| 2019 |
|
| % of Total |
|
| 2018 |
|
| % of Total |
| ||||
Towers revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
| $ | 8,947 |
|
| 77.8% |
|
| $ | 3,106 |
|
| 30.6% |
| ||
Latin America |
|
| 2,552 |
|
| 22.2% |
|
|
| 7,055 |
|
| 69.4% |
| ||
Total |
| $ | 11,499 |
|
| 100.0% |
|
| $ | 10,161 |
|
| 100.0% |
|
3951
| Nine Months Ended September 30, |
| ||||||||||||||
(Thousands) |
| 2018 |
|
| % of Total |
|
| 2017 |
|
| % of Total |
| ||||
Towers revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
| $ | 3,106 |
|
| 30.6% |
|
| $ | 1,287 |
|
| 19.3% |
| ||
Latin America |
|
| 7,055 |
|
| 69.4% |
|
|
| 5,392 |
|
| 80.7% |
| ||
Total |
| $ | 10,161 |
|
| 100.0% |
|
| $ | 6,679 |
|
| 100.0% |
|
The increase in U.S. revenue for the nine months ended September 30, 2018,2019, compared to the nine months ended September 30, 2017,2018, is primarily driven by our development activities, and the inclusion of a non-recurring charge of $1.1 million related to the accounting of straight-line rents in our U.S. operations during the nine months ended September 30, 2018. For nine months ended September 30, 2019, we completed the construction of 198 towers in the U.S. At September 30, 2019, the Uniti Towers’ domestic portfolio consisted of 628 wireless communications towers located in 32 states across the eastern and central regions in the United States, and acquisition of additional NMS developmentan increase from 352 wireless communications towers at September 30, 2018. The decrease in revenues in Latin America.America compared to the nine months ended September 30, 2018 is due to the April 2, 2019 sale of our Latin American tower portfolio.
Consumer CLEC – For the nine months ended September 30, 2018,2019, we recognized $10.8$8.7 million of revenue from the Consumer CLEC Business, compared to $14.0$10.8 million for the nine months ended September 30, 2017.2018. The decrease is primarily attributable to a loss of customers during the period. We served approximately 17,500 customers as of September 30, 2019, a 26% decrease from the approximate 23,700 customers served at September 30, 2018. The decrease in customers is due to the effects of competition and customer attrition,attrition. We have commenced a wind down of our Consumer CLEC business, which includes customer terminations. We anticipate seeing an acceleration of the decline in revenue as we served 23,674 customers asa result of September 30, 2018, a 25.1% decrease from 31,590 customers served at September 30, 2017.these efforts. We estimate that the wind down will be completed during the second quarter of 2020.
Interest Expense
Interest expense for the nine months ended September 30, 2019 totaled $286.8 million, which includes non-cash interest expense of $30.1 million resulting from the amortization of our debt discounts and debt issuance costs, partially offset by $2.2 million of capitalized interest. Interest expense for the nine months ended September 30, 2018, totaled $237.4 million, which includes non-cash interest expense of $18.3 million resulting from the amortization of our debt discounts and debt issuance costs. Interest
The increase is primarily related to an increase of interest expense forof $21.7 million on the nine months ended September 30, 2017 totaled $227.2Term Loan Facility as a result of the Fourth Amendment to our Credit Agreement, which increased the rate of our term loans by 200 basis points effective March 18, 2019, an increase of interest expense of $11.9 million on the Revolving Credit Facility primarily due to the Fifth Amendment to our credit agreement, which includesincreased the rate by 200 basis points effective June 24, 2019, and an increase of $3.6 million of cash interest expense incurred on our 4.0% Exchangeable Notes issued June 28, 2019. Furthermore, there was an increase in non-cash interest expense of $17.1 million resulting from the amortization of our debt discounts and debt issuance costs. The increase iscosts of $11.8 million related to $5.1 millionthe issues of interest expense on the 2024Exchangeable Notes issued in Mayand as a result of 2017, an increase in interest expense incurred on the revolving credit facility of $9.7 million due to increased borrowings and LIBOR rates compared to the prior year. This was partially offset by a decrease in interest expense related to interest rate swaps of $1.9 million and a decrease in interest expense related to capitalized interest of $4.3 million, which was not incurred in the nine months ended September 30, 2017.Fourth Amendment.
Depreciation and Amortization Expense
We incur depreciation and amortization expense related to our property, plant and equipment, corporate assets and intangible assets. Charges for depreciation and amortization for the nine months ended September 30, 2019 totaled $307.6 million, which included property, plant and equipment depreciation of $288.9 million and intangible asset amortization of $18.6 million. Charges for depreciation and amortization for the nine months ended September 30, 2018 totaled $342.3 million, which included property, plant and equipment depreciation of $323.3 million and intangible asset amortization of $19.0 million. Charges for depreciation and amortization for the nine months ended September 30, 2017 totaled $317.4 million, which included property, plant and equipment depreciation of $305.8 million and intangible asset amortization of $11.6 million. The increase is primarily driven by the timing of the acquisitions of Southern Light and Hunt.
General and Administrative Expense
General and administrative expenses include compensation costs, including stock-based compensation awards, professional and legal services, corporate office costs and other costs associated with administrative activities. For the nine months ended September 30, 2018,2019, general and administrative costs totaled $75.9 million, which includes $3.5 million of costs attributable to the timing of the ITS acquisition that occurred on October 19, 2018, compared to $63.9 million (8.6% of revenue), which includes $6.1 million of stock-based compensation expense. Forfor the nine months ended September 30, 2017, general and administrative costs totaled $49.5 million (7.4% of revenue), which includes $5.6 million of stock-based compensation expense. The increase is primarily driven by the timing of the acquisitions of Southern Light and Hunt, as Fiber Infrastructure general and administrative expenses for the nine months ended September 30, 2018 and 2017, totaled $36.7 million and $21.2 million, respectively.2018.
Operating Expense
Operating expense for the nine months ended September 30, 2018,2019, totaled $96.2$118.5 million (12.9% of revenue) compared to $74.3$96.2 million (11.1% of revenue) for the nine months ended September 30, 2017.2018, which was attributable to the increase in Fiber Infrastructure operating expenses. Operating expense for our reportable segments for the nine months ended September 30, 20182019 and 20172018 consisted of the following:
4052
| Nine Months Ended September 30, |
|
| Nine Months Ended September 30, |
| |||||||||||||||||||||||||||
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
| ||||||||||||||||||||
(Thousands) |
| Amount |
|
| % of Consolidated Revenues |
|
| Amount |
|
| % of Consolidated Revenues |
|
| Amount |
|
| % of Consolidated Revenues |
|
| Amount |
|
| % of Consolidated Revenues |
| ||||||||
Operating expenses by segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiber Infrastructure |
| $ | 81,660 |
|
| 10.9% |
|
| $ | 60,369 |
|
| 9.0% |
|
| $ | 103,006 |
|
| 13.1% |
|
| $ | 81,660 |
|
| 10.9% |
| ||||
Towers |
|
| 5,972 |
|
| 0.8% |
|
|
| 3,436 |
|
| 0.5% |
|
|
| 7,320 |
|
| 0.9% |
|
|
| 5,972 |
|
| 0.8% |
| ||||
CLEC |
|
| 8,145 |
|
| 1.1% |
|
|
| 10,453 |
|
| 1.6% |
|
|
| 6,916 |
|
| 0.9% |
|
|
| 8,145 |
|
| 1.1% |
| ||||
Leasing |
|
| 422 |
|
| 0.1% |
|
|
| - |
|
| 0.0% |
|
|
| 1,287 |
|
| 0.2% |
|
|
| 422 |
|
| 0.1% |
| ||||
Total operating expenses |
| $ | 96,199 |
|
| 12.9% |
|
| $ | 74,258 |
|
| 11.1% |
|
| $ | 118,529 |
|
| 15.1% |
|
| $ | 96,199 |
|
| 12.9% |
|
Fiber Infrastructure – The increase to Fiber Infrastructure operating expense is primarily driven by the timing of the acquisitions of Southern Light and Hunt. For the nine months ended September 30, 2018,2019, Fiber Infrastructure operating expenses totaled $81.7$103.0 million as compared to $60.4$81.7 million for the nine months ended September 30, 2017.2018. Operating expense consists of network related costs, such as dark fiber and tower rents, and lit service and maintenance expense. In addition, costs associated with our construction activities are presented within operating expenses. The increase in operating expenses is primarily attributable to an increase in network costs, specifically lit service and maintenancethe timing of the ITS acquisition that occurred on October 19, 2018, which incurred operating expenses. of $18.8 million for the nine months ended September 30, 2019.
Towers – Our Towers segment operating expense primarily consists primarily of ground rent, some or all of which may be passed to our tenants, as well as property taxes, regulatory fees and maintenance and repairs.repairs expenses. For the nine months ended September 30, 2019, Towers operating expense was $7.3 million and included $6.3 million of expenses related to our U.S. towers operations and $1.0 million related to our Latin American tower operations. For the nine months ended September 30, 2018 Towers operating expenseexpenses were $6.0 million and included $3.6$3.0 million of ground rent expense, comparedexpenses related to $2.2 million for the nine months ended September 30, 2017.each of our U.S. and Latin American towers operations. The change is attributable to an increase in completed towers at September 30, 2018 from September 30, 2017,the U.S. in primarily driven by our development activity inactivities, while the United State and acquisition of additional NMS development towersdecrease in Latin America.America is due to the sale of our Latin American tower portfolio.
Consumer CLEC – Expense associated with the Consumer CLEC Business is primarily attributable to the Wholesale Agreement and the Master Services Agreement entered into between us and Windstream in connection with the Spin-Off, and also includedincludes costs arising under the interconnection agreements with other telecommunication carriers. Expense associated with the Wholesale Agreement and Master Services Agreement for the nine months ended September 30, 20182019 totaled $6.0$4.8 million (0.8% of revenue) and $0.6$0.5 million, (0.1% of revenue), respectively, and expense associatedassociated with the Wholesale Agreement and the Master Services Agreement for the nine months ended September 30, 20172018 totaled $7.8$6.0 million (1.2%and $0.6 million, respectively. The decrease in expense is a direct result of revenue)a decrease in customers served, as these expenses are largely variable in nature.
Transaction Related and $1.1Other Costs
Transaction costs included incremental acquisition, pursuit, transaction and integration costs, including unsuccessful acquisition pursuit costs. In addition, these costs include costs incurred as a result of Windstream’s bankruptcy filing, costs associated with Windstream’s claims against us and costs associated with the implementation of our new enterprise resource planning system. For the nine months ended September 30, 2019, we incurred $28.9 million (0.2% of revenue),transaction related costs, compared to $12.0 million of such costs during the nine months ended September 30, 2018. The increase is primarily related to $21.4 million of total costs associated with the non-capitalizable Bluebird asset acquisition expenses, sale of our Latin America Tower portfolio, costs related to the Windstream bankruptcy, and costs associated with the implementation of our enterprise resource planning system. This increase was partially offset by a decrease in Uniti Fiber integration costs of $4.2 million.
Gain on Sale of Real Estate
For the nine months ended September 30, 2019, we recognized realized gains of $23.8 million and $5.1 million related to the April 2, 2019 sale of the Uniti Towers’ Latin American business and May 23, 2019 sale of U.S. ground lease business, respectively.
Other (Income) ExpenseIncome
We recognized in$32.1 million of other (income) expenseincome for the nine months ended September 30, 2019, which included a realized gain of $0.8 million in connection with an escrow settlement related to our Latin American operations and a $0.7$28.5 million unrealized gain for mark-to-market adjustments on our contingent consideration arrangements. For the nine months ended September 30, 2018, we recognized $1.6 million of other income, compared to a $0.7 million unrealized gain for mark-to-market adjustments on
53
our contingent consideration arrangements and a $0.8 million gain related to escrow settlements related to our Latin American tower operations.
Income Tax Expense (Benefit)
We recorded a $10.2 million income tax expense for the nine months ended September 30, 2018, compared2019. Included in income tax expense is approximately (i) $4.6 million of income tax expense related to the cancellation of debt income that was recognized for federal income tax purposes as a $9.6 million unrealized loss for mark-to-market adjustments on our contingent consideration arrangements for the nine months ended September 30, 2017. The fair valueresult of the contingent consideration arrangement connectedFourth Amendment, (ii) approximately $4.6 million of income tax expense related to capital gain from the sale of Uniti Towers’ Latin American business, (iii) approximately $4.0 million of income tax expense related to undistributed income from operations and (iv) approximately $2.7 million of income tax expense attributable to unrecognized tax benefit related to the July 3, 2017 acquisitionsale of Hunt is determined using the closing price ofUniti Towers’ Latin American business. Additionally, we recorded a $5.8 million income tax benefit related to pre-tax loss in our common shares in the active market, while the fair value of the contingent consideration arrangement in connection with the August 31, 2016 acquisition of Tower Cloud is determined using a discounted cash flow model and probability adjusted estimates of the future operational milestones.
Income Tax Benefit
Fiber Infrastructure segment. We recorded a $5.2 million income tax benefit for the nine months ended September 30, 2018, $1.3 million of which relates to the impact of the reduction in the corporate tax rate under the Tax BillCuts and Jobs Act on purchase price allocation adjustments recorded during the three months ended September 30, 2018 and the remainder of which is primarily driven by pre-tax loss in our Fiber Infrastructure segment.We recorded a $9.0 million income tax benefit for the nine months ended September 30, 2017, primarily as a result of an $8.0 million income tax benefit we recorded primarily related to the release of a valuation allowance due to the closing of the Southern Light transaction. The Southern Light transaction resulted in a deferred tax liability, and this future reversal of taxable temporary differences supports the realization of deferred tax assets which previously had a valuation allowance.
Non-GAAP Financial Measures
We refer to EBITDA, Adjusted EBITDA, Funds From Operations ("FFO"(“FFO”) (as defined by the National Association of Real Estate Investment Trusts ("NAREIT"(“NAREIT”)) and Adjusted Funds From Operations ("AFFO"(“AFFO”) in our analysis of our results of operations, which
41
are not required by, or presented in accordance with, accounting principles generally accepted in the United States ("GAAP"(“GAAP”). While we believe that net income, as defined by GAAP, is the most appropriate earnings measure, we also believe that EBITDA, Adjusted EBITDA, FFO and AFFO are important non-GAAP supplemental measures of operating performance for a REIT.
We define "EBITDA"“EBITDA” as net income, as defined by GAAP, before interest expense, provision for income taxes and depreciation and amortization. We define "Adjusted EBITDA"“Adjusted EBITDA” as EBITDA before 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, and costs associated with the implementation of our new enterprise resource planning system (collectively, "transaction related costs"“Transaction Related and Other Costs”), the write-off of unamortized deferred financing costs, costs incurred as a result of the early repayment of debt, 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). We believe EBITDA and Adjusted EBITDA are important supplemental measures to net income because they provide additional information to evaluate our operating performance on an unleveraged basis. In addition, Adjusted EBITDA is calculated similar to defined terms in our material debt agreements used to determine compliance with specific financial covenants. Since EBITDA and Adjusted EBITDA are not measures calculated in accordance with GAAP, they should not be considered as an alternativealternatives to net income determined in accordance with GAAP.
Because the historical cost accounting convention used for real estate assets requires the recognition of depreciation expense except on land, such accounting presentation implies that the value of real estate assets diminishes predictably over time. However, since real estate values have historically risen or fallen with market and other conditions, presentations of operating results for a REIT that uses historical cost accounting for depreciation could be less informative. Thus, NAREIT created FFO as a supplemental measure of operating performance for REITs that excludes historical cost depreciation and amortization, among other items, from net income, as defined by GAAP. FFO is defined by NAREIT as net income applicableattributable to common shareholders computed in accordance with GAAP, excluding gains or losses from real estate dispositions, plus real estate depreciation and amortization and impairment charges. We compute FFO in accordance with NAREIT's NAREIT’s definition.
We defineThe Company defines AFFO as FFO excluding (i) transaction and integration related costs; (ii) Windstream bankruptcy and litigation related expenses; (iii) certain non-cash revenues and expenses such as stock-based compensation expense, amortization of debt and equity discounts, amortization of deferred financing costs, depreciation and amortization of non-real estate assets, straight-line revenues, non-cash income taxes, and the amortization of other non-cash revenues to the extent that cash has not been received, such as revenue associated with the amortization of TCIs; (iii)and (iv) the impact, which may be recurring in nature, of the write-off of unamortized deferred financing fees, additional costs incurred as a result of the early repayment of debt, taxes associated with tax basis cancellation of debt, gains or losses on dispositions, changes in the fair value of contingent consideration and financial instruments and similar or infrequent items less maintenance capital expenditures. We believe that the use of FFO and AFFO, and their respective per share amounts, combined with the required GAAP presentations, improves the understanding of operating results of REITs among investors and analysts, and makes comparisons of operating results among such companies more meaningful. We consider FFO and AFFO to be useful measures for reviewing comparative operating performance. In particular, we believe AFFO, by excluding certain
54
revenue and expense items, can help investors compare our operating performance between periods and to other REITs on a consistent basis without having to account for differences caused by unanticipated items and events, such as transaction and integration related costs. The Company uses FFO and AFFO, and their respective per share amounts, only as performance measures, and FFO and AFFO do not purport to be indicative of cash available to fund our future cash requirements. While FFO and AFFO are relevant and widely used measures of operating performance of REITs, they do not represent cash flows from operations or net income as defined by GAAP and should not be considered an alternative to those measures in evaluating our liquidity or operating performance.
Further, our computations of EBITDA, Adjusted EBITDA, FFO and AFFO may not be comparable to that reported by other REITs or companies that do not define FFO in accordance with the current NAREIT definition or that interpret the current NAREIT definition or define EBITDA, Adjusted EBITDA and AFFO differently than we do.
42
The reconciliation of our net income to EBITDA and Adjusted EBITDA and of our net income attributable to common shareholders to FFO and AFFO for the three and nine months ended September 30, 20182019 and 20172018 is as follows:
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||||
(Thousands) | 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||||||
Net income (loss) | $ | 4,224 |
|
| $ | 4,835 |
|
| $ | 1,862 |
|
| $ | (31,625 | ) | |||||||||||||||
Net (loss) income | $ | (19,777 | ) |
| $ | 4,224 |
|
| $ | 22,262 |
|
| $ | 1,862 |
| |||||||||||||||
Depreciation and amortization |
| 112,748 |
|
|
| 113,444 |
|
|
| 342,311 |
|
|
| 317,404 |
|
| 101,166 |
|
|
| 112,748 |
|
|
| 307,571 |
|
|
| 342,311 |
|
Interest expense |
| 80,406 |
|
|
| 78,784 |
|
|
| 237,398 |
|
|
| 227,235 |
| |||||||||||||||
Income benefit |
| (1,466 | ) |
|
| (8,672 | ) |
|
| (5,208 | ) |
|
| (8,976 | ) | |||||||||||||||
Interest expense, net |
| 104,655 |
|
|
| 80,406 |
|
|
| 286,842 |
|
|
| 237,398 |
| |||||||||||||||
Income tax (benefit) expense |
| (1,745 | ) |
|
| (1,466 | ) |
|
| 10,152 |
|
|
| (5,208 | ) | |||||||||||||||
EBITDA | $ | 195,912 |
|
| $ | 188,391 |
|
| $ | 576,363 |
|
| $ | 504,038 |
| $ | 184,299 |
|
| $ | 195,912 |
|
| $ | 626,827 |
|
| $ | 576,363 |
|
Stock based compensation |
| 1,963 |
|
|
| 1,968 |
|
|
| 6,058 |
|
|
| 5,621 |
|
| 2,845 |
|
|
| 1,963 |
|
|
| 7,930 |
|
|
| 6,058 |
|
Transaction related costs |
| 2,323 |
|
|
| 8,512 |
|
|
| 12,025 |
|
|
| 32,213 |
| |||||||||||||||
Other (income) expense |
| (1,038 | ) |
|
| (3,933 | ) |
|
| (1,574 | ) |
|
| 9,638 |
| |||||||||||||||
Transaction related and other costs |
| 15,179 |
|
|
| 2,323 |
|
|
| 28,883 |
|
|
| 12,025 |
| |||||||||||||||
Gain on sale of real estate |
| (205 | ) |
|
| - |
|
|
| (28,995 | ) |
|
| - |
| |||||||||||||||
Other expense (income) |
| 540 |
|
|
| (1,038 | ) |
|
| (24,848 | ) |
|
| (1,574 | ) | |||||||||||||||
Adjusted EBITDA | $ | 199,160 |
|
| $ | 194,938 |
|
| $ | 592,872 |
|
| $ | 551,510 |
| $ | 202,658 |
|
| $ | 199,160 |
|
| $ | 609,797 |
|
| $ | 592,872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||||
(Thousands) | 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||||||
Net income (loss) attributable to common shareholders | $ | 2,075 |
|
| $ | 2,939 |
|
| $ | (4,357 | ) |
| $ | (37,091 | ) | |||||||||||||||
Net (loss) income attributable to common shareholders | $ | (19,470 | ) |
| $ | 2,075 |
|
| $ | 19,789 |
|
| $ | (4,357 | ) | |||||||||||||||
Real estate depreciation and amortization |
| 93,295 |
|
|
| 95,519 |
|
|
| 284,271 |
|
|
| 278,714 |
|
| 81,084 |
|
|
| 93,295 |
|
|
| 247,246 |
|
|
| 284,271 |
|
Gain on sale of real estate assets, net of tax |
| (205 | ) |
|
| - |
|
|
| (24,420 | ) |
|
| - |
| |||||||||||||||
Participating securities share in earnings |
| 655 |
|
|
| 388 |
|
|
| 1,992 |
|
|
| 1,156 |
|
| 50 |
|
|
| 655 |
|
|
| 301 |
|
|
| 1,992 |
|
Participating securities share in FFO |
| (655 | ) |
|
| (388 | ) |
|
| (1,992 | ) |
|
| (1,156 | ) |
| (306 | ) |
|
| (655 | ) |
|
| (875 | ) |
|
| (1,992 | ) |
Adjustments for noncontrolling interests |
| (2,152 | ) |
|
| (2,222 | ) |
|
| (6,556 | ) |
|
| (2,222 | ) |
| (1,472 | ) |
|
| (2,152 | ) |
|
| (4,506 | ) |
|
| (6,556 | ) |
FFO attributable to common shareholders | $ | 93,218 |
|
| $ | 96,236 |
|
| $ | 273,358 |
|
| $ | 239,401 |
| $ | 59,681 |
|
| $ | 93,218 |
|
| $ | 237,535 |
|
| $ | 273,358 |
|
Transaction related costs |
| 2,323 |
|
|
| 8,512 |
|
|
| 12,025 |
|
|
| 32,213 |
| |||||||||||||||
Transaction related and other costs |
| 15,179 |
|
|
| 2,323 |
|
|
| 28,883 |
|
|
| 12,025 |
| |||||||||||||||
Change in fair value of contingent consideration |
| (199 | ) |
|
| (3,933 | ) |
|
| (687 | ) |
|
| 9,091 |
|
| (2,999 | ) |
|
| (199 | ) |
|
| (28,530 | ) |
|
| (687 | ) |
Amortization of deferred financing costs and debt discount |
| 6,193 |
|
|
| 6,110 |
|
|
| 18,340 |
|
|
| 17,091 |
|
| 12,386 |
|
|
| 6,193 |
|
|
| 30,045 |
|
|
| 18,340 |
|
Stock based compensation |
| 1,963 |
|
|
| 1,968 |
|
|
| 6,058 |
|
|
| 5,621 |
|
| 2,845 |
|
|
| 1,963 |
|
|
| 7,930 |
|
|
| 6,058 |
|
Non-real estate depreciation and amortization |
| 19,453 |
|
|
| 17,925 |
|
|
| 58,040 |
|
|
| 38,690 |
|
| 20,082 |
|
|
| 19,453 |
|
|
| 60,325 |
|
|
| 58,040 |
|
Straight-line revenues |
| (3,532 | ) |
|
| (3,609 | ) |
|
| (10,932 | ) |
|
| (10,857 | ) |
| (34 | ) |
|
| (3,532 | ) |
|
| (1,450 | ) |
|
| (10,932 | ) |
Maintenance capital expenditures |
| (1,015 | ) |
|
| (1,476 | ) |
|
| (3,165 | ) |
|
| (3,454 | ) |
| (1,539 | ) |
|
| (1,015 | ) |
|
| (6,265 | ) |
|
| (3,165 | ) |
Amortization of discount on convertible preferred stock |
| 745 |
|
|
| 745 |
|
|
| 2,235 |
|
|
| 2,235 |
|
| - |
|
|
| 745 |
|
|
| 993 |
|
|
| 2,235 |
|
Adjustment to deferred tax valuation analysis |
| - |
|
|
| (7,992 | ) |
|
| - |
|
|
| (7,992 | ) | |||||||||||||||
Other non-cash (revenue) expense, net |
| (8,738 | ) |
|
| (3,509 | ) |
|
| (25,998 | ) |
|
| (9,304 | ) | |||||||||||||||
Cash taxes on tax basis cancellation of debt |
| - |
|
|
| - |
|
|
| 4,590 |
|
|
| - |
| |||||||||||||||
Other, net |
| (6,177 | ) |
|
| (8,738 | ) |
|
| (21,826 | ) |
|
| (25,998 | ) | |||||||||||||||
Adjustments for noncontrolling interests |
| (368 | ) |
|
| (310 | ) |
|
| (1,203 | ) |
|
| (310 | ) |
| (708 | ) |
|
| (368 | ) |
|
| (1,443 | ) |
|
| (1,203 | ) |
AFFO attributable to common shareholders | $ | 110,043 |
|
| $ | 110,667 |
|
| $ | 328,071 |
|
| $ | 312,425 |
| $ | 98,716 |
|
| $ | 110,043 |
|
| $ | 310,787 |
|
| $ | 328,071 |
|
Critical Accounting Estimates
55
We make certain judgments and use certain estimates and assumptions when applying accounting principles in the preparation of our consolidated financial statements.Condensed Consolidated Financial Statements. The nature of the estimates and assumptions are material due to the levels of subjectivity and judgment necessary to account for highly uncertain factors or the susceptibility of such factors to change. We have identified the accounting for income taxes, revenue recognition, useful lives of assets, the impairment of property, plant and equipment, goodwill impairment and business combinations as critical accounting estimates, as they are the most important to our financial statement presentation and require difficult, subjective and complex judgments.
We believe the current assumptions and other considerations used to estimate amounts reflected in our financial statementsaccompanying Condensed Consolidated Financial Statements are appropriate. However, if actual experience differs from the assumptions and other considerations used in estimating amounts reflected in our consolidated financial statements,Condensed Consolidated Financial Statements, the resulting changes could have a material adverse effect on our consolidated results of operations and, in certain situations, could have a material adverse effect on our financial condition.
43
For further information on our critical accounting estimates, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the notes to our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017,2018, filed with the SEC on March 1, 2018.18, 2019. As of September 30, 2018,2019, there has been no material change to these estimates.
Liquidity and Capital Resources
Our principal liquidity needs are to fund operating expenses, meet debt service requirements, fund investment activities, including capital expenditures, and make dividend distributions. Our primary sources of liquidity and capital resources are cash on hand, cash provided by operating activities (primarily arising under the Master Lease with Windstream), available borrowings under our credit agreement by and among the Operating Partnership, CSL Capital, LLC and Uniti Group Finance Inc., the guarantors and lenders party thereto and Bank of America, N.A., as administrative agent and collateral agent (the “Credit Agreement”), and proceeds from the issuance of debt and equity securities.
As of September 30, 2018,2019, we had cash and cash equivalents of $118.5 million and $210 million$197.3 million. There have been no material outlays of undrawn borrowing capacity under the Revolving Credit Facility. Subsequentfunds subsequent to September 30, 2018, we used an aggregate of $273.8 million of funds for the closing of the CableSouth and ITS transactions, recurring interest payments, and declared dividend distributions.2019. Availability under our Revolving Credit Facility is subject to various conditions, including a maximum secured leverage ratio of 5.0:1.1, although it is currently substantially drawn. In addition, if we incur debt under our Revolving Credit Facility or otherwise such that our total leverage ratio exceeds 6.5:1, our debt instruments would impose significant restrictions on our ability to pay dividends.
Cash provided by operating activities was $399.9$561.8 million and $337.8$399.9 million for the nine months ended September 30, 2019 and 2018, and 2017, respectively. Cash provided by operating activities is primarily attributable to our leasing activities.
Cash used in investing activities was $451.2 million for the nine months ended September 30, 2019, which was driven by capital expenditures ($264.9 million) and the acquisition of Bluebird fiber network assets ($319.0 million), partially offset by proceeds related to the sale of Uniti Towers’ Latin American and ground lease businesses and sale of Uniti Fiber’s Midwest operations ($136.8 million). Cash used in investing activities was $300.4 million for the nine months ended September 30, 2018, which was driven by capital expenditures ($297.1 million), primarily related to our Uniti Fiber and Uniti Leasing businesses.
Cash used in investingprovided by financing activities was $957.2$48.8 million for the nine months ended September 30, 2017,2019, which was driven byprimarily represents the acquisitionsproceeds from issuance of Southern Lightnotes ($635.9345.0 million), Huntproceeds from sale of the Warrants ($127.950.8 million), NMS assets and net proceeds under our ATM Program ($68.621.6 million), and ground lease investments ($13.9 million),. This was partially offset by a Tower Cloud working capital adjustmentdividend payments ($0.2129.1 million), and capital expenditurespayment for bond hedge option ($111.170.0 million), primarilynet repayments under the Revolving Credit Facility ($65.0 million), payments for financing costs ($49.5 million), contingent consideration payments ($32.3 million), principal payments related to our Uniti Fiberthe Term Loan Facility ($15.8 million) and Uniti Towers businesses. The increase in capital expenditures is duedistributions paid to network deployments related to our Uniti Fiber and Uniti Towers businesses.
As of September 30, 2018, under the terms of the purchase agreement with NMS, we acquired 89 of the 105 towers, which were under development at the time of the NMS acquisition, for approximately $8.4 million. We do not expect to close on any additional NMS development towers.
noncontrolling interests ($2.9 million). Cash used in financing activities was $41.0 million for the nine months ended September 30, 2018, which primarily representsrepresented the dividend payments ($318.1 million), contingent consideration payments ($18.6 million), principal payments related to the Term Loan Facility ($15.8 million), and distributions paid to noncontrolling interests ($7.4 million), partially offset by net borrowings under the Revolving Credit Facility ($260.0 million) and net proceeds under our ATM Program ($64.4 million).Cash provided
On June 28, 2019, Uniti Fiber issued $345 million aggregate principal amount of the Exchangeable Notes. The Exchangeable Notes are guaranteed by the Company and each of the Company’s subsidiaries (other than Uniti Fiber) 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 financing activities was $497.2 millionarrears on June 15 and December 15 of each year, beginning on December 15, 2019. The Exchangeable Notes are exchangeable into cash,
56
shares of the Company’s common stock, or a combination thereof, at Uniti Fiber’s election. The Exchangeable Notes will mature on June 15, 2024, unless earlier exchanged, redeemed or repurchased. The Exchangeable Notes were sold to qualified institutional buyers pursuant to Rule 144A under the Securities Act. See Note 10 to our accompanying Condensed Consolidated Financial Statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q for the nine months ended September 30, 2017, which primarily represents theadditional information.
The net proceeds from the sale of common stock through a public offering ($498.9 million)the Exchangeable Notes were approximately $334.7 million, after deducting discounts and proceeds fromcommissions to the 2024 Notes issued in May 2017 ($201.0 million), whichInitial Purchasers and other estimated fees and expenses. A portion of the net proceeds were used to fund the acquisitions of Southern Light and Hunt, and netrepay outstanding borrowings under the Revolving Credit Facility, ($160.0 million), partially offset by dividend payments ($294.3 million), deferred financing costs relatedas described above, and to pay the term loan repricing and 2024 Notes issued in May 2017 ($28.5 million), contingent consideration payments ($19.9 million), and principal payments related to the Term Loan Facility ($15.8 million).
We have an effective shelf registration statement on fileapproximately $70.0 million cost associated with the SEC (the “Registration Statement”) exchangeable note hedge transactions, as described in Note 8 to offerour accompanying Condensed Consolidated Financial Statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q. The remaining net proceeds will be used for general corporate purposes, which may include funding acquisitions (including Bluebird) and sell various securitiesthe repayment of additional borrowings under the Revolving Credit Facility. The Company also received approximately $50.8 million from timethe sale of warrants, as described in Note 8 to time. Under the Registration Statement, weour accompanying Condensed Consolidated Financial Statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q.
We have established an at-the-marketat the market common stock offering program (the “ATM Program”) to sell shares of common stock having an aggregate offering price of up to $250.0$250 million. During the quarter ended September 30, 2018, we issued and sold 3.2 million shares of common stock at a weighted average price of $20.52 per share under theThe ATM Program receiving net proceedsis currently suspended following the June 15, 2019 expiration of $64.4 million, after commissions of $0.8 million and other offering costs. our shelf registration statement. As of September 30, 2018,2019, we have approximately $184.8$117.1 million available for issuance under the ATM Program. ThisWhen in operation, this program provideswas 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. In addition, our UPREIT structure enables us to acquire properties by issuing to sellers, as a form of consideration, limited partnership interests in our operating partnership, (commonly called “OP Units”). We believe that this structure will facilitate our ability to acquire individual properties and portfolios of properties by enabling us to structure transactions
44
which will defer taxes payable by a seller while preserving our available cash for other purposes, including the possible payment of dividends.
We anticipate continuing to invest in our network infrastructure across our Uniti Leasing, Uniti Fiber and Uniti Towers portfolios. We anticipate declaring dividends for the 2019 tax year to comply with our REIT distribution requirements, although such dividends are expected to be lower than in prior periods. We anticipate that we will partially finance these needs, together with operating expenses (including debt service) from our $197.3 million of cash on hand, and borrowing availability under the Revolving Credit Facility, cash flows provided by operating activities, together with funds anticipatedactivities. However, we may need to be accessed inaccess the capital markets to generate additional funds that will be sufficient to fund our business operations, announced investment activities, capital expenditures, and, debt service and distributions to our shareholders overshareholders. We are closely monitoring the next twelve months.equity and debt markets and will seek to access them promptly when we determine market conditions are appropriate.
The amount, nature and timing of any capital markets transactions will depend on: our operating performance and other circumstances; our then-current commitments and obligations; the amount, nature and timing of our capital requirements; any limitations imposed by our current credit arrangements; and overall market conditions. These expectations are forward-looking and subject to a number of uncertainties and assumptions. If our expectations about our liquidity prove to be incorrect or we are unable to access the capital markets as we anticipate, we wouldcould be subject to a shortfall in liquidity in the future which could lead to a reduction in our capital expenditures and/or dividends. If this shortfall occurs rapidly and with little or no notice, it could limit our ability to address the shortfall on a timely basis.
Contractual ObligationsIn addition to exploring potential capital markets transactions, the Company regularly evaluates market conditions, its liquidity profile, and various financing alternatives for opportunities to enhance its capital structure. If opportunities are favorable, the Company may refinance or repurchase existing debt. However, there can be no assurances that any debt refinancing would be on similar or more favorable terms than our existing arrangements. This would include the risk that interest rates could increase and/or there may be changes to our existing covenants.
On June 24, 2019, we entered into the Fifth Amendment to our Credit Agreement to extend the maturity date of $575.9 million of commitments under the Revolving Credit Facility to April 24, 2022, pay down approximately $101.6 million of outstanding revolving loans and terminate the related commitments. The maturity date of approximately $72.4 million of other commitments was not extended. On June 28, 2019, the Company repaid approximately $174.0 million in total borrowings, which consisted of the $101.6 million required repayment pursuant to the Fifth Amendment and $72.4 million of non-extended borrowings, thereby terminating the non-extended commitments. As a result, all remaining $575.9 million of September 30,commitments will terminate on April 24, 2022, at which time all outstanding borrowings must be repaid. The Company used a portion of the net proceeds from the offering of Exchangeable Notes described above to fund the repayments. The Fifth Amendment increased the applicable margin for base rate loans under the Revolving Credit Facility to a range of 2.75% to 3.25% and for Eurodollar rate loans under the Revolving Credit Facility to a range of 3.75% to 4.25%, calculated in a customary manner and determined based on our consolidated secured leverage ratio.
57
In light of recent developments and uncertainty surrounding Windstream and the effect of substantial doubt about our ability to continue as a going concern, as discussed in Note 2 to our accompanying Condensed Consolidated Financial Statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q and in Part I, Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2018, we had contractualhave taken measures, and may take further measures to conserve cash as we anticipate that it may be more difficult for us to access the capital markets at attractive rates until such uncertainty is clarified. Windstream has the option to assume or reject the Master Lease. While we believe that the Master Lease is essential to Windstream’s operations, it is difficult to predict what could occur in a restructuring, and even a temporary disruption in payments to us may require us to fund certain expenses and obligations (e.g., real estate taxes, insurance and commitmentsmaintenance expenses) to preserve the value of our properties and avoid the imposition of liens on our properties and could impact our ability to fund other cash obligations, including dividends necessary to maintain REIT status, non-essential capital expenditures and, in an extreme case, our debt service obligations. Windstream has also filed claims against us alleging, among other things: that the Master Lease should be recharacterized as follows:a financing transaction, which would impact its treatment in Windstream’s bankruptcy (including potentially through changing our status to that of a creditor that would share in creditor recoveries from the estate rather than receive rent payments) and could affect our status as a REIT; that the Master Lease is a lease of personal property; and that rent payments and tenant capital improvements made by Windstream under the Master Lease since at least the third quarter of 2017 constitute constructive fraudulent transfers. A rejection of the Master Lease, an adverse determination by a judge on Windstream’s claims against us, or even a temporary disruption in payments to us, may require us to fund certain expenses and obligations (e.g., real estate taxes, insurance and maintenance expenses) to preserve the value of our properties, and could materially adversely affect our consolidated results of operations, liquidity and financial condition, including our ability to service debt, comply with financial and other covenants and maintain our status as a REIT.
Although management has concluded the probability of a rejection of the Master Lease to be remote, and has noted the absence of any provision in the Master Lease that contemplates renegotiation of the lease and the lack of any ability of the bankruptcy court to unilaterally reset the rent or terms of the lease, it is difficult to predict what could occur in Windstream’s bankruptcy restructuring, including any judicial decisions in respect of claims against us by Windstream or its creditors. Accordingly, we may elect to suspend, delay or reduce success-based capital expenditures and further reduce dividend payments to conserve cash. However, because the Master Lease is essential to Windstream’s operations, absent any adverse determination in respect to Windstream’s claims against us, which we believe is unlikely, we expect that any disruption in payments by Windstream would likely be limited. Based on our analysis, including consideration of the timing of petitioners’ requirements to make post-petition lease payments under U.S. bankruptcy law and absent any adverse determination in respect to Windstream’s claims or disruptions in rent payments under the Master Lease, we believe that we have adequate liquidity to continue to fund our operations for twelve months after the issuance of the accompanying Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, absent any adverse determination in respect to Windstream’s claims or disruptions in rent payments under the Master Lease. If our assumptions are incorrect, we could need additional sources of liquidity to fund our cash needs and cannot assure that we will obtain them. A rejection by Windstream of the Master Lease, an adverse determination by a judge on Windstream’s claims against us, or Windstream’s inability or unwillingness to meet its rent and other obligations under the Master Lease could materially adversely affect our consolidated results of operations, liquidity, and financial condition, including our ability to service debt, comply with financial and other covenants and pay dividends to our stockholders as required to maintain our status as a REIT.
|
| Payments Due by Period |
| |||||||||||||||||
(millions) |
| Less than 1 Year |
|
| 1-3 Years |
|
| 3-5 Years |
|
| More than 5 Years |
|
| Total |
| |||||
Long-term debt(a) |
| $ | 21 |
|
| $ | 582 |
|
| $ | 2,558 |
|
| $ | 1,710 |
|
| $ | 4,871 |
|
Interest payments on long-term debt obligations(b) |
|
| 250 |
|
|
| 497 |
|
|
| 420 |
|
|
| 110 |
|
|
| 1,277 |
|
Operating leases |
|
| 11 |
|
|
| 13 |
|
|
| 6 |
|
|
| 16 |
|
|
| 46 |
|
Capital Leases |
|
| 9 |
|
|
| 15 |
|
|
| 13 |
|
|
| 54 |
|
|
| 91 |
|
Network deployment(c) |
|
| 47 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 47 |
|
Total projected obligations and commitments(d) |
| $ | 338 |
|
| $ | 1,107 |
|
| $ | 2,997 |
|
| $ | 1,890 |
|
| $ | 6,332 |
|
|
|
|
|
|
|
|
|
Dividends
We arehave elected to be taxed as a REIT for U.S. federal income tax purposes. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its taxable income. In order to maintain our REIT status, we intend to make regular quarterly dividend payments of all or substantially all of our taxable income to holders of our common stock out of assets legally available for this purpose, if and to the extent authorized by our board of directors. Before we make any dividend payments, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service obligations. If our cash available for distribution is less than our taxable income, we could be required to sell assets or borrow funds to make cash dividends or we may make a portion of the required dividend in the form of a taxable distribution of stock or debt securities.securities.
On March 18, 2019, we received a limited waiver and amendment to our Credit Agreement (the “Fourth Amendment”). During the pendency of Windstream’s bankruptcy, or at such earlier time when certain conditions are specified, the Fourth Amendment generally limits our ability under the Credit Agreement to pay cash dividends in excess of 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gains.
The following table below sets out details regarding our cash dividends on our common stock:
Period |
| Payment Date |
| Cash Dividend Per Share |
|
| Record Date | |
October 1, 2017 - December 31, 2017 |
| January 12, 2018 |
| $ | 0.60 |
|
| December 29, 2017 |
January 1, 2018 - March 31, 2018 |
| April 13, 2018 |
| $ | 0.60 |
|
| March 30, 2018 |
April 1, 2018 - June 30, 2018 |
| July 13, 2018 |
| $ | 0.60 |
|
| June 29, 2018 |
July 1, 2018 - September 30, 2018 |
| October 15, 2018 |
| $ | 0.60 |
|
| September 28, 2018 |
4558
Period |
| Payment Date |
| Cash Dividend Per Share |
|
| Record Date | |
October 1, 2018 - December 31, 2018 |
| January 15, 2019 |
| $ | 0.60 |
|
| December 31, 2018 |
January 1, 2019 - March 31, 2019 |
| April 15, 2019 |
| $ | 0.05 |
|
| April 1, 2019 |
April 1, 2019 - June 30, 2019 |
| July 15, 2019 |
| $ | 0.05 |
|
| June 28, 2019 |
July 1, 2019 - September 30, 2019 |
| October 15, 2019 |
| $ | 0.05 |
|
| September 30, 2019 |
Any dividends must be declared by our Board of Directors, which will take into account various factors including our current and anticipated operating results, our financial position, REIT requirements, conditions prevailing in the market, restrictions in our debt documents and additional factors they deem appropriate. Dividend payments are not guaranteed and our Board of Directors may decide, in its absolute discretion, at any time and for any reason, not to pay dividends or to change the amount paid as dividends. In light of recent developments with Windstream, we may take measures to conserve cash, which may include a suspension, delay or reduction in our dividend.
Capital Expenditures
We categorize our capital expenditures as either (i) success-based, (ii) maintenance, (iii) integration or (iii)(iv) corporate and non-network. We define success-based capital expenditures as those which are tiedrelated to installing existing or anticipated contractual obligations to customers or are discretionary in nature and are intended to add growth capacity to our existing network.customer service orders. Maintenance capital expenditures are those necessary to keep existing network elements fully operational. Integration capital expenditures are those made specifically with respect to recent acquisitions that are essential to integrating acquired companies in our business. We anticipate continuing to invest in our network infrastructure across our Uniti Leasing, Uniti Fiber and Uniti Towers portfolios, and expect that cash on hand borrowings under our Revolving Credit Facility, and cash flows provided by operating activities will be sufficient to support these investments.The Company has committed to fund approximately $23.0 million of growth capital expenditures related to the Bluebird Lease, of which $7.9 million has already been paid.
In light of recent developments with Windstream, we may need to take measures to conserve cash, which may include a suspension, delay or reduction in success-based capital expenditures. We are closely monitoring developments of the Windstream bankruptcy and continually assess our capital expenditure plans in light of such developments.
Recent Accounting Guidance
New accounting rules and disclosures can impact our reported results and comparability of our financial statements. These matters are described in our Annual Report on Form 10-K for the year ended December 31, 2017,2018, filed with the SEC on March 1, 2018.18, 2019.
In August 2017, the FASB issued Accounting Standards Update (“ASU”) No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”), which amends and simplifies existing guidance in order to allow companies to more accurately present the economic effects of risk management activities in the financial statements. ASU 2017-12 is effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods, and earlier adoption is permitted. We adopted ASU 2017-12 effectiveEffective January 1, 2018, and there was no material impact on our financial position.
In February 2017, the FASB issued ASU No. 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting2019, we account for Partial Sales of Nonfinancial Assets (“ASU 2017-05”), which provides guidance for recognizing gains and losses from the transfer of nonfinancial assets and for partial sales of nonfinancial assets, and is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2017. We adopted ASU 2017-05 effective January 1, 2018, using the modified retrospective approach and there was no material impact on our financial position.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 provides guidance on reducing the diversityleases in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. In addition to other specific cash flow issues, ASU 2016-15 provides clarification on when an entity should separate cash receipts and cash payments into more than one class of cash flows and when an entity should classify those cash receipts and payments into one class of cash flows on the basis of predominance.accordance with ASC 842. The new guidance is effective for the fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. We adopted ASU 2016-15 effective January 1, 2018, and there was no material impact on our financial position.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“Topic 606”). This update outlines a single comprehensive revenue recognition model for entities to follow in accounting for revenue from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity should recognize revenue for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to receive for those goods or services. Topic 606 is effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods. We adopted Topic 606 as of January 1, 2018 using the modified retrospective transition method.
In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASC 842”), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The new standard requires lessees to apply a dual approach, classifying 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 asset (“ROU”) and interest expense recognized based on an effective interest method, or as a single lease cost recognized on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. The accounting for lessors remains largely unchanged from existing guidance. unchanged. Leases with a term of 12 months or less will be accounted for similar toconsistent with existing guidance for operating leases today.
We determine if an arrangement is a lease at contract inception. A lease exists when a contract conveys to the customer the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. The provisionsdefinition of this guidance are effective for annual periods beginning after December 31, 2018,a lease embodies two conditions: (i) there is an identified asset in the contract that is land or a depreciable asset (i.e., property, plant, and for interim periods therein. The Company is currently evaluating this guidanceequipment), and (ii) the customer has the right to determinecontrol the impact it will have on our financial statements by reviewing its existing operatinguse of the identified asset.
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. The Company expects a gross-up of its Consolidated Balance Sheets as a result of recognizing lease liabilitiesOperating leases where we are the lessor are included in Leasing, Fiber Infrastructure and right-of-use assets, the extent of the impact of a gross-up is under evaluation. The Company does not anticipate material changes to the recognition of operating lease expense in itsTower revenues on our Condensed Consolidated Statements of Income.
From time to time we enter into direct financing lease arrangements 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 equipment at the date of lease inception.
46
59
ROU assets and lease liabilities related to operating leases where we are the lessee are included in other assets and accounts payable, accrued expenses and other liabilities, respectively, on our Condensed Consolidated Balance Sheets. The lease liabilities are initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date.
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 Condensed 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.
iv. | 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. |
v. | 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. |
vi. | Lease payments included in the measurement of the lease asset or liability comprise the following: (a) fixed payments (including in-substance fixed payments), (b) variable payments that depend on index or rate based on the index or rate at lease commencement, and (c) 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 probable, the lessee is placed on non-accrual status and Leasing revenue is recognized when cash payments are received.
The ROU asset is initially measured at cost, which comprises 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 January 2018,those cases, the FASB issuedROU 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 Condensed Consolidated Statements of Income 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 profit or loss.
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We have lease agreements which include lease and nonlease components. For both leases where we are a lessor and leases where we are a lessee, we have elected to combine lease and nonlease components for all lease contracts. Nonlease components that are combined with lease components are primarily maintenance services related to the leased asset. Where we are the lessor, we determine whether the lease or nonlease component is the predominant component on a case-by-case basis. For all existing leases where we are the lessor, ASC Topic 842 has been applied to all combined components.
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.
We adopted ASC 842 using a modified retrospective transition approach as of the effective date as permitted by the amendments in ASU 2018-01, 2018-11, Leases (Topic 842) – : Target Improvements, which provides an alternative modified retrospective transition method. As a result, we were not required to adjust our comparative period financial information for effects of the standard or make the new required lease disclosures for periods before the date of adoption (i.e. January 1, 2019). We have elected to adopt the package of transition practical expedients and, therefore, have not reassessed (i) whether existing or expired contracts contain a lease, (ii) lease classification for existing or expired leases or (iii) the accounting for initial direct costs that were previously capitalized. We elected the practical expedient to use hindsight for leases existing at the adoption date. Further, we elected to adopt the amendments in ASU 2018-01: Land Easement Practical Expedient for Transition to Topic 842. This standard, which permits an entity to elect an optional transitiontransaction practical expedient to not evaluate land easements that exist or expire before the Company'sCompany’s adoption of ASC 842 and that were not previously accounted for as leases under ASC 840. The Company intends to elect this transition provision.840, Leases (“ASC 840”).
Off-Balance Sheet Arrangements
As of the date of this Quarterly Report on Form 10-Q, we do not have any off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes from the information reported under Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2017,2018, filed with the SEC on March 1, 2018.18, 2019.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
We have established disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our principal executive and principal financial officers as appropriate, to allow timely decisions regarding required disclosure.
Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2018.2019. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2018.2019.
Changes in Internal Control over Financial Reporting
ThereManagement implemented both a new enterprise resource planning system and a billing management system during the quarter ended September 30, 2019. The new systems are expected to enhance the overall system of internal control over financial reporting through further automation and integration of business processes and were not implemented in response to any identified deficiency or a material weakness in our internal control over financial reporting. The implementations are significant in scale and complexity and significantly affect certain accounting functions. Both during the implementation of the two new systems, and afterwards, we modified certain of our internal controls to verify our controls were designed and operating effectively for all key financial reporting assertions.
Other than as discussed above, there have been no changes in our internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act, that occurred during the quarter ended September 30, 20182019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II—OTHEROTHER INFORMATION
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.
Pursuant to the Master Lease, Windstream has agreed to indemnify us for, among other things, any use, misuse, maintenance or repair by Windstream with respect to the Distribution Systems. Windstream is currently a party to various legal actions and administrative proceedings, including various claims arising in the ordinary course of its telecommunications business, which are subject to the indemnities provided by Windstream to us. If Windstream assumes the Master Lease, it would be obligated to honor all indemnification claims. If Windstream were to reject the Master Lease, any indemnification claims would be treated as unsecured claims, and, if that were to occur, there can be no assurance we would receive any indemnification payments from Windstream. While these actions and proceedings are not believed to be material, individually or in the aggregate, the ultimate outcome of these matters cannot be predicted. The resolution of any such legal proceedings, either individually or in the aggregate, could have a material adverse effect on Windstream’s business, financial position or results of operations, which, in turn, could have a material adverse effect on our business, financial position or results of operations if Windstream is unable to meet its indemnification obligations.
Windstream was involved in litigation with an entity who acquired certain Windstream debt securities and thereafter issued a notice of default as to such securities relating to the Spin-Off. Windstream challenged the matter in federal court and a trial was held in July 2018. On February 15, 2019, the federal court judge issued a ruling against Windstream, finding that Windstream’s attempts to waive such default were not valid; that an “event of default” occurred with respect to such debt securities; and that the holder’s acceleration of such debt in December 2017 was effective.
In response to the adverse outcome, on February 25, 2019, Windstream and all of its subsidiaries filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York.
In bankruptcy, Windstream has the option to assume or reject the Master Lease. While we believe that the Master Lease is essential to Windstream’s operations, it is difficult to predict what could occur in a restructuring, and even a temporary disruption in payments to us may require us to fund certain expenses and obligations (e.g., real estate taxes, insurance and maintenance expenses) to preserve the value of our properties and avoid the imposition of liens on our properties and could impact our ability to fund other cash obligations, including dividends necessary to maintain REIT status, non-essential capital expenditures and, in an extreme case, our debt service obligations. See Item 1A Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2018 for additional information concerning the impact Windstream’s bankruptcy may have on our operations and financial conditions. A rejection by Windstream of the Master Lease, an adverse determination by a judge on Windstream’s claims against us, or its inability or unwillingness to meet its rent and other obligations under the Master Lease could materially adversely affect our consolidated results of operations, liquidity, and financial condition, including our ability to service debt, comply with debt covenants and pay dividends to our stockholders as required to maintain our status as a REIT. A rejection of the Master Lease by Windstream would result in an “event of default” under our Credit Agreement if we are unable to enter into a replacement lease that satisfies certain criteria set forth in the Credit Agreement 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.
The Master Lease contains no provision that contemplates renegotiation of the lease and the bankruptcy court has no ability to unilaterally reset the rent or terms of the lease. In addition, our Credit Agreement prohibits the Company from amending the Master Lease in a manner that, among other provisions, pro forma for any such amendment, would result in our consolidated secured leverage ratio to exceed 5.0 to 1.0, and management has no intention to enter into a lease amendment that would violate our debt covenants.
On July 25, 2019, in connection with Windstream’s bankruptcy, Windstream Holdings and Windstream Services, LLC filed a complaint with the U.S. Bankruptcy Court for the Southern District of New York against the Company and certain of its affiliates alleging¸ among other things, that the Master Lease should be recharacterized as a financing arrangement, that the Master Lease is a lease of personal property, and that rent payments and tenant capital improvements made by Windstream under the Master Lease since at least the third quarter of 2017 constitute constructive fraudulent transfers. If the Master Lease is recharacterized as a financing arrangement, Windstream would be deemed the true owner of the property subject to the Master Lease, and Uniti would be treated as a creditor of Windstream rather than as a landlord, which could significantly affect current payments to us under the Master Lease, the ultimate treatment of our claims (including potentially through changing our status to that of a creditor that would share in creditor recoveries from the estate rather than receive rent payments) and our status as a REIT. If the Master Lease is determined to be a lease
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of personal property, the deadline for Windstream Holdings to assume or reject the Master Lease would be the confirmation of its plan by the bankruptcy court, and Windstream may seek from the bankruptcy court relief from its current performance obligations during the bankruptcy case. If the constructive fraudulent transfer claim is successful, Uniti may be required to repay Windstream the amount of rent payments and tenant capital improvements since at least the third quarter of 2017. In parallel with the filing of the complaint, Windstream Holdings also filed a motion to stay the deadline under which Windstream must assume or reject the Master Lease pending the resolution of issues raised in the complaint. Mediation of these claims is ongoing in Windstream’s bankruptcy. In connection with the mediation, Uniti has agreed to an extension of the assumption deadline for the Master Lease to December 7, 2019. In exchange, Windstream has provided certain assurances regarding the continued payment of rent pursuant to the Master Lease during the extension period and following the expiration of the extension period, Windstream will continue to make payments under the Master Lease as they come due, unless and until Windstream obtains an order from the bankruptcy court permitting cessation of such payments.
It is difficult to predict what could occur in Windstream’s bankruptcy restructuring, including any judicial decisions in respect of claims against us by Windstream or its creditors. Any adverse determination or judicial decision could have a material adverse effect on our business, financial position or results of operations.
On July 3, 2019, SLF Holdings, LLC (“SLF”) filed a complaint against the Company, Uniti Fiber Holdings Inc. (“Uniti Fiber”), and certain current and former officers of the Company (collectively, the “Defendants”) in the United States District Court for the Southern District of Alabama, in connection with Uniti Fiber’s purchase of Southern Light, LLC from SLF in July 2017. The complaint asserts claims for fraud and conspiracy, as well as claims under federal and Alabama securities laws, alleging that Defendants improperly failed to disclose to SLF the risk that the Spin-Off and entry into the Master Lease violated certain debt covenants of Windstream. SLF seeks compensatory and punitive damages, as well as reformation of the purchase agreement for the sale. On September 26, 2019, the action was transferred to United States District Court for the District of Delaware. We intend to defend this matter vigorously, and, because it is still in its preliminary stages, have not yet determined what effect this lawsuit will have, if any, on our financial position or results of operations.
On October 25, 2019, Ibrahim E. Safadi filed a putative class action in the U.S. District Court for the Eastern District of Arkansas against the Company and certain of our officers alleging violations of federal securities laws. The putative class action seeks to represent investors who acquired the Company’s securities between April 20, 2015 and February 15, 2019. The lawsuit asserts violations under Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder, alleging that the Company made materially false and misleading statements by allegedly failing to disclose that the Spin-Off and entry into the Master Lease violated certain debt covenants of Windstream. The lawsuit seeks class certification, unspecified monetary damages, costs and attorneys’ fees and other relief. We intend to defend this matter vigorously, and, because it is still in its preliminary stages, have not yet determined what effect this lawsuit will have, if any, on our financial position or results of operations.
There have been no material changes to the risk factors affecting our business that were discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 20172018 filed with the SEC on March 1, 2018.18, 2019.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
NoneOn July 2, 2019, the Company issued 8,677,163 shares of its common stock in connection with the conversion by PEG Bandwidth Holdings, LLC of 87,500 shares of the Series A Shares. The Company issued common stock with a total value of $87,500,000 based on the five-day volume weighted average price of its common stock ending on June 27, 2019. Upon conversion, all outstanding Series A Shares were cancelled and no longer remain outstanding. The issuance by the Company of the common stock was made in reliance upon the exception from registration requirements pursuant to Section 3(a)(9) of the Securities Act.
Issuer Purchases of Equity Securities
The table below provides information regarding shares withheld from Uniti employees to satisfy minimum statutory tax withholding obligations arising from the vesting of restricted stock granted under the Uniti Group Inc. 2015 Equity Incentive Plan. The shares of common stock withheld to satisfy tax withholding obligations may be deemed purchases of such shares required to be disclosed pursuant to this Item 2.
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Period |
| Total Number of Shares Purchased |
| Average Price Paid per Share(1) |
| Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
| Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
| ||||
July 1, 2019 to July 31, 2019 |
|
| — |
| $ | — |
|
| — |
|
| — |
|
August 1, 2019 to August 31, 2019 |
|
| 4,044 |
|
| 7.39 |
|
| — |
|
| — |
|
September 1, 2019 to September 30, 2019 |
|
| — |
|
| — |
|
| — |
|
| — |
|
Total |
|
| 4,044 |
| $ | 7.39 |
|
| — |
|
| — |
|
(1) The average price paid per share is the weighted-average of the fair market prices at which we calculated the number of shares withheld to cover tax withholdings for the employees.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Mine Safety Disclosures.
Not Applicable
Certain Recent U.S. Federal Income Tax DevelopmentsNone
The following is a summary of certain recent amendments to the Internal Revenue Code of 1986, as amended (the “Code”), that may be relevant to an investment in our common stock.
In any circumstances in which we may be subject to entity-level taxation at the regular U.S. federal corporate income tax rate, such rate is now 21%.
Distributions that we make to our taxable U.S. stockholders out of current or accumulated earnings and profits (as determined for U.S. federal income tax purposes) that we do not designate as capital gain dividends will generally be taken into account by such stockholders as ordinary income (now taxed at maximum rates of 37% for individuals and 21% for corporations) and will not be eligible for the dividends received deduction for corporations. While, with limited exceptions, dividends we pay are not eligible for taxation at the preferential income tax rates applicable to “qualified dividend income,” a U.S. stockholder that is not a corporation for U.S. federal income tax purposes may now be eligible for a deduction equal to 20% of ordinary dividend distributions received from REITs.
We are required to withhold from distributions to a non-U.S. stockholder (other than a qualified foreign pension fund or a qualified collective investment vehicle) that are treated as effectively connected with a U.S. trade or business, such as USRPI capital gain dividends, an amount of tax based on the maximum amount that could have been designated as USRPI capital gain dividends. As a result of recent changes to the Code, the applicable rate of this withholding generally now is 21%.
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Exhibit Number |
| Description |
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31.2* |
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32.1* |
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32.2* |
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101.INS |
| Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. |
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101.SCH |
| Inline XBRL Taxonomy Extension Schema Document |
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101.CAL |
| Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF |
| Inline XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB |
| Inline XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE |
| Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
* | Filed herewith. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| UNITI GROUP INC. | ||
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Date: | November |
| /s/ Mark A. Wallace | ||
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| Mark A. Wallace Executive Vice President – Chief Financial Officer and Treasurer (Principal Financial Officer) | ||
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Date: | November |
| /s/ Blake Schuhmacher | ||
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| Blake Schuhmacher Senior Vice President – Chief Accounting Officer (Principal Accounting Officer) |
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