UNITI GROUP INC. 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 months endedMarch 31, 2022 . This discussion should be read in conjunction with the accompanying 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 filed with theU.S. Securities and Exchange Commission ("SEC") onFebruary 25, 2022 , as amended by Amendment No. 1 thereto filed on Form 10-K/A with theSEC onMarch 22, 2022 (the "Annual Report").
Overview
Company Description
OnApril 24, 2015 , we were separated and spun-off (the "Spin-Off") from Windstream Holdings, Inc. ("Windstream Holdings " and together withWindstream Holdings II, LLC , its successor in interest, and its subsidiaries, "Windstream") pursuant to which Windstream contributed certain telecommunications network assets, including fiber and copper networks and other real estate (the "Distribution Systems") 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 of our leasing revenues are currently derived. In connection with Windstream's emergence from bankruptcy, Uniti and Windstream bifurcated the Master Lease and entered into two structurally similar master leases (collectively, the "Windstream Leases"), which amended and restated the Master Lease in its entirety. The Windstream Leases consist of (a) a master lease (the "ILEC MLA") that governs Uniti owned assets used for Windstream's incumbent local exchange carrier ("ILEC") operations and (b) a master lease (the "CLEC MLA") that governs Uniti owned assets used for Windstream's CLEC operations. 27
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Uniti operates as a REIT forU.S. federal income tax purposes. As a REIT, the Company is generally not subject toU.S. federal income taxes on income generated by its REIT operations, which includes income derived from the Windstream Leases. We have elected to treat the subsidiaries through which we operate our fiber business,Uniti Fiber , certain aspects of our leasing business,Uniti Leasing , certain aspects of our former towers business, andTalk America Services, LLC , which operated 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 toU.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 , aDelaware 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 theOperating Partnership as a tax-efficient acquisition currency. As ofMarch 31, 2022 , we are the sole general partner of theOperating Partnership and own approximately 99.8% of the partnership interests in theOperating Partnership . In addition, we have undertaken series of transactions to permit us to hold certain assets through subsidiaries that are taxed as REITs, which may also facilitate future acquisition opportunities. We aim 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) leasing of dark fiber and selling of lit services on our existing fiber network assets that we either constructed or acquired; (iii) 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; (iv) 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 (v) mergers and acquisitions financing, whereby we facilitate mergers and acquisition transactions as a capital partner, including through operating company-property company ("OpCo-PropCo") structures.
Segments
We manage our operations as the two reportable business segments, in addition to our corporate operations, which include:
Leasing Segment: Represents the operations of our leasing business,Uniti Leasing , which is engaged in the acquisition and construction of mission-critical communications assets and leasing them to anchor customers on either an exclusive or shared-tenant basis, in addition to the leasing of dark fiber on our existing fiber network assets that we either constructed or acquired. While the Leasing segment represents our REIT operations, certain aspects of the Leasing segment are also operated through TRSs. 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.
Corporate Operations: Represents our corporate office and shared 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 and the impact, which may be
recurring in nature, of transaction and integration related costs, costs
associated with Windstream's bankruptcy, costs associated with litigation claims
made against us, costs associated with the implementation of our enterprise
resource planning system, executive severance costs, costs related to the
settlement with Windstream, amortization of non-cash rights-of-use assets, the
write off of unamortized deferred financing costs, costs incurred as a result of
the early repayment of debt, including early tender and redemption premiums and
costs associated with the termination of related hedging activities, gains or
losses on dispositions, changes in the fair value of contingent consideration
and financial instruments, and other similar or infrequent items (although we
may not have had such charges in the periods presented). Adjusted EBITDA
includes adjustments to reflect the Company's share of Adjusted EBITDA from
unconsolidated entities. For more information on Adjusted EBITDA, see "Non-GAAP
Financial Measures." Detailed information about our segments can be found in
Note 12 to our accompanying Condensed Consolidated Financial Statements
contained in Part I, Item 1 of this Quarterly Report on Form 10-Q.
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Table of Contents Results of Operations
Comparison of the three months ended
The following table sets forth, for the periods indicated, our results of operations expressed as dollars and as a percentage of total revenues:
Three Months Ended March 31,
2022 2021
(Thousands) Amount % of Revenues Amount % of Revenues
Revenues:
Leasing $ 204,641 73.6% $ 194,936 71.5%
Fiber Infrastructure 73,393 26.4% 77,650 28.5%
Total revenues 278,034 100.0% 272,586 100.0%
Costs and Expenses:
Interest expense 96,172 34.5% 140,581 51.5%
Depreciation and amortization 71,457 25.7% 70,964 26.0%
General and administrative expense 23,870 8.6% 25,823 9.5%
Operating expense (exclusive of
depreciation and amortization) 34,976 12.6% 38,084 14.0%
Transaction related and other costs 1,714 0.6% 4,137 1.5%
Other (income) expense, net (398 ) (0.1%) 454 0.2%
Total costs and expenses 227,791 81.9% 280,043 102.7%
Income (loss) before income taxes and
equity in earnings from unconsolidated
entities 50,243 18.1% (7,457 ) (2.7%)
Income tax benefit (2,071 ) (0.7%) (2,557 ) (0.9%)
Equity in earnings from unconsolidated
entities (544 ) (0.2%) (398 ) (0.1%)
Net income (loss) 52,858 19.0% (4,502 ) (1.7%)
Net income (loss) attributable to
noncontrolling interests 128 0.1% (64 ) (0.1%)
Net income (loss) attributable to
shareholders 52,730 18.9% (4,438 ) (1.6%)
Participating securities' share in
earnings (331 ) (0.1%) (248 ) (0.1%)
Dividends declared on convertible
preferred stock (5 ) (0.0%) (3 ) (0.0%)
Net income (loss) attributable to
common shareholders $ 52,394 18.8% $ (4,689 ) (1.7%)
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The following tables set forth, for the three months endedMarch 31, 2022 and 2021, revenues, Adjusted EBITDA and net (loss) income of our reportable segments: Three Months Ended March 31, 2022 Subtotal of Reportable (Thousands) Leasing Fiber Infrastructure Corporate Segments Revenues$ 204,641 $ 73,393 $ -$ 278,034 Adjusted EBITDA$ 198,973 $ 31,459$ (5,643 ) $ 224,789 Less: Interest expense 96,172 Depreciation and 42,102 29,319 36 71,457 amortization Other, net 361 Transaction related 1,714 and other costs Stock-based 3,312 compensation Income tax benefit (2,071 ) Adjustments for equity in earnings 986 from unconsolidated entities Net income$ 52,858 Three Months Ended March 31, 2021 Subtotal of Reportable (Thousands) Leasing Fiber Infrastructure Corporate Segments Revenues$ 194,936 $ 77,650 $ -$ 272,586 Adjusted EBITDA$ 191,497 $ 29,721$ (6,970 ) $ 214,248 Less: Interest expense 140,581 Depreciation and 42,226 28,670 68 70,964 amortization Other, net 1,318 Transaction related 4,137 and other costs Stock-based 3,335 compensation Income tax benefit (2,557 ) Adjustments for equity in earnings 972 from unconsolidated entities Net loss$ (4,502 ) 30
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Summary of Operating Metrics
Operating Metrics
As of March 31,
2022 2021 % Increase / (Decrease)
Operating metrics:
Leasing:
Fiber strand miles 4,910,000 4,550,000 7.9%
Copper strand miles 230,000 230,000 0.0%
Fiber Infrastructure:
Fiber strand miles 2,760,000 2,490,000 10.8%
Customer connections 26,631 26,315 1.2%
Revenues
Three Months Ended March 31,
2022 2021
% of
% of Consolidated Consolidated
(Thousands) Amount Revenues Amount Revenues
Revenues:
Leasing $ 204,641 73.6% $ 194,936 71.5%
Fiber Infrastructure 73,393 26.4% 77,650 28.5%
Total revenues $ 278,034 100.0% $ 272,586 100.0%
Leasing - Leasing revenues are primarily attributable to rental revenue from
leasing our Distribution Systems to Windstream pursuant to the Windstream Leases
(and historically, the Master Lease). Under the Windstream Leases, Windstream is
responsible for the costs related to operating the Distribution Systems,
including property taxes, insurance, and maintenance and repair costs. As a
result, we do not record an obligation related to the payment of property taxes,
as Windstream makes direct payments to the taxing authorities. The initial term
of the Windstream Leases expires on April 30, 2030 . Annual rent under the
Windstream Leases for the full year 2022 is $668.9 million and is subject to
annual escalation at a rate of 0.5%. For a description of the Windstream Leases,
see Part I, Item 2 Management's Discussion and Analysis in "Liquidity and
Capital Resources-Windstream Master Lease and Windstream Leases."
The rent for the first year of each renewal term will be an amount agreed to by
us and Windstream. While the agreement requires that the renewal rent be "Fair
Market Rent ," if we are unable to agree, the renewal Fair Market Rent will be
determined by an independent appraisal process. Commencing with the second year
of each renewal term, the renewal rent will increase at an escalation rate of
0.5%.
Pursuant to the Windstream Leases, Windstream (or any successor tenant under a
Windstream Lease) has the right to cause Uniti to reimburse up to an aggregate
$1.75 billion for certain growth capital improvements in long-term value
accretive fiber and related assets made by Windstream (or the applicable tenant
under the Windstream Lease) to certain ILEC and CLEC properties (the "Growth
Capital Improvements" or "GCIs"). Uniti's total annual reimbursement commitments
to Windstream for the Growth Capital Improvements is discussed below in this
Part I, Item 2 Management's Discussion and Analysis in "Liquidity and Capital
Resources-Windstream Master Lease and Windstream Leases."
Starting on the first anniversary of each installment of reimbursement for a
Growth Capital Improvement, the rent payable by Windstream under the applicable
Windstream Lease will increase by an amount equal to 8.0% (the "Rent Rate") of
such installment of reimbursement. The Rent Rate will thereafter increase to
100.5% of the prior Rent Rate on each anniversary of each reimbursement. In the
event that the tenant's interest in either Windstream Lease is transferred by
Windstream under the terms thereof (unless transferred to the same transferee),
or if Uniti transfers its interests as landlord under either Windstream Lease
(unless to the same transferee), the reimbursement rights and obligations will
be allocated between the ILEC MLA and the CLEC MLA by Windstream, provided that
the maximum that may be allocated to the CLEC MLA following such transfer is $20
million per year. If Uniti fails to reimburse any Growth Capital Improvement
reimbursement payment or equipment loan funding request as and when it is
required to do so under the terms of the Windstream Leases, and such failure
continues for thirty (30) days, then such unreimbursed
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amounts may be applied as an offset against the rent owed by Windstream under
the Windstream Leases (and such amounts will thereafter be treated as if Uniti
had reimbursed them).
The Windstream Leases provide 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. TCIs exclude
Growth Capital Improvements as and when reimbursed by Uniti.
Three Months Ended March 31,
2022 2021
% of Segment % of Segment
(Thousands) Amount Revenues Amount Revenues
Leasing revenues:
Windstream Leases:
Cash revenue
Cash rent $ 166.7 81.5% $ 165.8 85.1%
GCI revenue 1.9 0.9% - 0.0%
Total cash revenue 168.6 82.4% 165.8 85.1%
Non-cash revenue
TCI revenue 10.4 5.1% 9.3 4.7%
GCI revenue 3.9 1.9% 1.7 0.9%
Other straight-line revenue 3.1 1.5% 3.9 2.0%
Total non-cash revenue 17.4 8.5% 14.9 7.6%
Total Windstream Leases revenue 186.0 90.9% 180.7 92.7%
Other triple-net leasing and dark fiber IRU 18.6 9.1% 14.2 7.3%
Total Leasing revenues $ 204.6 100.0% $ 194.9 100.0%
The increase in TCI revenue is attributable to continued investment by
Windstream, which invested $38.7 million in TCIs during the three months ended
March 31, 2022 , offset by the Growth Capital Improvement reimbursement of
capital improvements completed in 2021, as allowed under the Settlement, that
were previously classified as TCIs of $29.0 million . The total amount invested
in TCIs by Windstream since the inception of the Windstream Leases and Master
Lease was $994.4 million as of March 31, 2022 .
The increase in GCI revenue is attributable to Uniti's continued reimbursement
of Growth Capital Improvements. During the three months ended March 31, 2022 ,
Uniti reimbursed $48.2 million of Growth Capital Improvements. Subsequent to
March 31, 2022 , Windstream requested, and we reimbursed $10.4 million of
qualifying Growth Capital Improvements. As of the date of this Quarterly Report
on Form 10-Q, we have reimbursed a total of $364.8 million of Growth Capital
Improvements.
For the three months ended
Because a substantial portion of our revenue and cash flows are derived from lease payments by Windstream pursuant to the Windstream Leases, there could be a material adverse impact on our consolidated results of operations, liquidity, financial condition and/or ability to maintain our status as a REIT and service debt if Windstream were to become unable to generate sufficient cash to make payments to us. Prior to its emergence from bankruptcy onSeptember 21, 2020 , Windstream was a publicly traded company and was subject to the periodic filing requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Windstream's historic filings through their quarter endedJune 30, 2020 can be found at www.sec.gov. Additionally, the Windstream audited financial statements as ofDecember 31, 2021 , and for the year endedDecember 31, 2021 , as ofDecember 31, 2020 and for the period fromSeptember 22, 2020 toDecember 31, 2020 and for the period fromJanuary 1, 2020 toSeptember 21, 2020 and for the year endedDecember 31, 2019 are included as an exhibit to our Annual Report. OnSeptember 22, 2020 , Windstream filed a Form 15 to terminate all filing 32
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obligations under Section 12(g) and 15(d) under the Exchange Act. Windstream filings are not incorporated by reference in this Quarterly Report on Form 10-Q.
We monitor the credit quality of Windstream through numerous methods, including by (i) reviewing credit ratings of Windstream by nationally recognized credit agencies, (ii) reviewing the financial statements of Windstream that are required to be delivered to us pursuant to the Windstream Leases, (iii) monitoring news reports regarding Windstream and its business, (iv) conducting research to ascertain industry trends potentially affecting Windstream, (v) monitoring Windstream's compliance with the terms of the Windstream Leases and (vi) monitoring the timeliness of its payments under the Windstream Leases. As of the date of this Quarterly Report on Form 10-Q, Windstream is current on all lease payments. We note that inAugust 2020 , Moody's Investor Service assigned a B3 corporate family rating with a stable outlook to Windstream in connection with its post-emergence exit financing. At the same time,S&P Global Ratings assigned Windstream a B- issuer rating with a stable outlook. Both ratings remain current as of the date of this filing. In order to assist us in our continuing assessment of Windstream's creditworthiness, we periodically receive certain confidential financial information and metrics from Windstream.
Fiber Infrastructure - Fiber Infrastructure revenues for the three months ended
Three Months Ended March 31,
2022 2021
% of Segment % of Segment
(Thousands) Amount Revenues Amount Revenues
Fiber Infrastructure revenues:
Lit backhaul services $ 19,438 26.5% $ 25,044 32.3%
Enterprise and wholesale 20,935 28.5% 21,000 27.0%
E-Rate and government 14,276 19.5% 19,364 24.9%
Dark fiber and small cells 18,083 24.6% 11,426 14.7%
Other services 661 0.9% 816 1.1%
Total Fiber Infrastructure revenues $ 73,393 100.0% For the three months endedMarch 31, 2022 , Fiber Infrastructure revenues totaled$73.4 million as compared to$77.7 million for the three months endedMarch 31, 2021 . As ofMarch 31, 2022 , we had approximately 26,631 customer connections, up from 26,315 customer connections as ofMarch 31, 2021 . The$4.3 million decrease in Fiber Infrastructure revenues is attributable to the following factors: (i) Lit backhaul service revenues decreased$5.6 million driven by a$4.3 million decrease attributable to the Uniti Fiber Northeast operations sold onMay 28, 2021 , a$1.0 million decrease due to lit-to-dark fiber conversions and$0.3 million decease due to contract renewals at a lower rate and longer term; and (ii) E-Rate and government decreased$5.1 million primarily related to a$4.0 million decrease in installation and equipment sales and a$0.7 million decrease due to the wind down of our construction activities. These reductions were partially offset by a$6.7 million increase in dark fiber and small cell revenues primarily attributable to one-time early termination revenues. 33
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Interest Expense, net
Three Months Ended March 31,
Increase /
(Thousands) 2022 2021 (Decrease)
Interest expense, net:
Cash:
Senior secured notes $ 51,066 $ 52,547 (1,481 )
Senior unsecured notes 31,988 34,885 (2,897 )
Senior secured revolving credit facility -
variable rate 2,602 2,315 287
Tender premium payment - 17,550 (17,550 )
Interest rate swap termination 2,830 2,829 1
Other 356 921 (565 )
Total cash interest 88,842 111,047 (22,205 )
Non-cash:
Amortization of deferred financing costs and
debt discount 4,514 4,959 (445 )
Write off of deferred financing costs and
debt discount - 20,415 (20,415 )
Accretion of settlement payable 2,876 4,563 (1,687 )
Capitalized Interest (60 ) (403 ) 343
Total non-cash interest 7,330 29,534 (22,204 )
Total interest expense, net $ 96,172 $ 140,581 $ (44,409 )
Interest expense for the three months ended March 31, 2022 decreased $44.4
million compared to the three months ended March 31, 2021 . The decrease is
primarily due to the February 2, 2021 issuance of $1.11 billion aggregate
principal amount of 6.50% Senior Unsecured Notes due 2029 (the "2029 Notes")
used to fund the redemption of the 8.25% Senior Unsecured Notes due 2023 (the
"2023 Notes") which resulted in a $17.6 million tender premium payment and the
$20.4 million write off of deferred financing costs and debt discount during the
three months ended March 31, 2021 and reduced cash interest of $2.5 million for
the three months ended March 31, 2022 .
Depreciation and Amortization Expense
Three Months Ended March 31,
Increase /
(Thousands) 2022 2021 (Decrease)
Depreciation and amortization expense by segment:
Depreciation expense
Leasing $ 40,372 $ 43,170 $ (2,798 )
Fiber Infrastructure 23,602 22,952 650
Corporate 36 68 (32 )
Total depreciation expense 64,010 66,190 (2,180 )
Amortization expense
Leasing 1,730 (944 ) 2,674
Fiber Infrastructure 5,717 5,718 (1 )
Total amortization expense 7,447 4,774 2,673
Total depreciation and amortization expense
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Leasing - Leasing depreciation expense decreased$2.8 million for the quarter endedMarch 31, 2022 as compared to the quarter endedMarch 31, 2021 . The decrease is primarily attributable to a$3.1 million decrease related to the natural decrease in remaining useful life of the Windstream Distribution System assets which utilize the group composite depreciation method, partially offset by a$0.4 million increase in depreciation related to depreciable asset additions sinceMarch 31, 2021 . During the three months endedMarch 31, 2021 ,$2.7 million was recorded as a benefit to amortization expense, and subsequently reclassified to revenue during the fourth quarter of 2021. Fiber Infrastructure - Fiber Infrastructure depreciation expense increased$0.7 million for the quarter endedMarch 31, 2022 as compared to the quarter endedMarch 31, 2021 . The increase in depreciation expense is primarily attributable to depreciable asset additions sinceMarch 31, 2021 , net of depreciation expenses due to fully depreciated assets and disposals.
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 of our
segments.
Three Months Ended March 31,
2022 2021
% of
% of Consolidated Consolidated
(Thousands) Amount Revenues Amount Revenues
General and administrative expense by
segment:
Leasing $ 3,303 1.2% $ 2,570 0.9%
Fiber Infrastructure 12,646 4.6% 13,836 5.1%
Corporate 7,921 2.8% 9,417 3.5%
Total general and administrative
expenses $ 23,870 8.6%
Leasing - Leasing general and administrative expense increased
Fiber Infrastructure - Fiber Infrastructure general and administrative expense decreased$1.2 million for the three months endedMarch 31, 2022 as compared to the three months endedMarch 31, 2021 . This decrease is primarily attributable to decreases in bad debt reserves of$0.3 million driven by increased collections, decreased personnel expense of$0.2 million and gains on the sale of equipment and idle fleet vehicle assets of$0.2 million . Corporate - Corporate general and administrative expense decreased$1.5 million for the three months endedMarch 31, 2022 as compared to the three months endedMarch 31, 2021 . The decrease is attributable to a$1.2 million decrease in insurance expenses and$1.0 million decrease in personnel expenses, partially offset by a$0.5 million increase in professional and legal expenses.
Operating Expense
Operating expense for the three months endedMarch 31, 2022 decreased by$3.1 million from the three months endedMarch 31, 2021 , which was primarily attributable to a decrease in Fiber Infrastructure operating expenses partially offset by an increase in Leasing operating expenses discussed below. Operating expense for our reportable segments for the three months endedMarch 31, 2022 and 2021 consisted of the following: Three Months Ended March 31, 2022 2021 % of Consolidated % of Consolidated (Thousands) Amount Revenues Amount Revenues Operating expenses by segment: Leasing$ 4,867 1.8%$ 3,229 1.2% Fiber Infrastructure 30,109 10.8% 34,855 12.8% Total operating expenses$ 34,976 12.6%$ 38,084 14.0% 35
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Leasing - Leasing operating expense was$4.9 million and$3.2 million for the three months endedMarch 31, 2022 and 2021, respectively. The increase is primarily driven by growth within our Leasing business growth resulting in a$1.0 million increase in network expenses. Fiber Infrastructure - For the three months endedMarch 31, 2022 , Fiber Infrastructure operating expenses totaled$30.1 million as compared to$34.9 million for the three months endedMarch 31, 2021 . 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$4.7 million decrease in operating expenses is primarily attributable to decreases of$3.9 million in equipment sales and installations expenses,$1.7 million in expenses related to the Uniti Fiber Northeast operations sold onMay 28, 2021 and$1.1 million in construction related expenses, partially offset by a$1.5 million increase in dark fiber early termination fees.
Transaction Related and Other Costs
Transaction related and other costs included incremental acquisition, pursuit, transaction and integration costs (including unsuccessful acquisition pursuit costs), 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 endedMarch 31, 2022 , we incurred$1.7 million of transaction related and other costs, compared to$4.1 million of such costs during the three months endedMarch 31, 2021 . The decrease is primarily attributable to a$1.3 million decrease in costs incurred related to the Windstream bankruptcy for the comparable periods.
Income Tax Benefit
The income tax benefit recorded for the three months ended
Three Months Ended March 31,
(Thousands) 2022 2021
Income tax benefit
Pre-tax loss (Fiber Infrastructure) $ (3,812 ) $ (3,058 )
Other undistributed REIT taxable income 1,160 -
REIT state and local taxes 538 370
Other 43 131
Total income tax benefit $ (2,071 ) $ (2,557 )
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Non-GAAP Financial Measures
We refer to EBITDA, Adjusted EBITDA, Funds From Operations ("FFO") (as defined
by the National Association of Real Estate Investment Trusts ("NAREIT")) and
Adjusted Funds From Operations ("AFFO") in our analysis of our results of
operations, which are not required by, or presented in accordance with,
accounting principles generally accepted in the United States ("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" as net income, as defined by GAAP, before interest expense,
provision for income taxes and depreciation and amortization. We define
"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 enterprise resource planning system, (collectively, "Transaction Related
and Other Costs"), costs related to the settlement with Windstream, goodwill
impairment charges, executive severance costs, amortization
of non-cash rights-of-use assets, the write off of unamortized deferred
financing costs, costs incurred as a result of the early repayment of
debt, including early tender and redemption premiums and costs associated with
the termination of related hedging activities, gains or losses on dispositions,
changes in the fair value of contingent consideration and financial instruments,
and other similar or infrequent items (although we may not have had such charges
in the periods presented). Adjusted EBITDA includes adjustments to reflect the
Company's share of Adjusted EBITDA from unconsolidated entities. 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 alternatives 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 attributable 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, and includes adjustments
to reflect the Company's share of FFO from unconsolidated entities. We compute
FFO in accordance with NAREIT's definition.
The Company defines AFFO, as FFO excluding (i) Transaction Related and Other
Costs; (ii) costs related to the litigation settlement with
Windstream, accretion on our settlement obligation, and gains on prepayment of
our settlement obligation as these items are not reflective of ongoing operating
performance; (iii) goodwill impairment charges; (iv) 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, amortization of non-cash rights-of-use
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; and (v) 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, including
early tender and redemption premiums and costs associated with the termination
of related hedging activities, executive severance costs, 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. AFFO includes
adjustments to reflect the Company's share of AFFO from unconsolidated
entities. 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 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.
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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. The reconciliation of our net income (loss) to EBITDA and Adjusted EBITDA and of our net income (loss) attributable to common shareholders to FFO and AFFO for the three months endedMarch 31, 2022 and 2021 is as follows: Three Months Ended March 31, (Thousands) 2022 2021 Net income (loss) $ 52,858 $ (4,502 ) Depreciation and amortization 71,457 70,964 Interest expense, net 96,172 140,581 Income tax benefit (2,071 ) (2,557 ) EBITDA$ 218,416 $ 204,486 Stock based compensation 3,312 3,335 Transaction related and other costs 1,714
4,137
Other, net 361
1,318
Adjustments for equity in earnings from unconsolidated entities 986 972 Adjusted EBITDA$ 224,789 $ 214,248 Three Months Ended March 31, (Thousands) 2022 2021 Net income (loss) attributable to common shareholders $ 52,394 $ (4,689 ) Real estate depreciation and amortization 51,893
53,377
Participating securities share in earnings 331
248
Participating securities share in FFO (658 ) (344 ) Real estate depreciation and amortization from unconsolidated entities 690
616
Adjustments for noncontrolling interests (129 ) (796 ) FFO attributable to common shareholders$ 104,521 $
48,412
Transaction related and other costs 1,714
4,137
Change in fair value of contingent consideration -
21
Amortization of deferred financing costs and debt discount 4,514
4,959
Write off of deferred financing costs and debt discount -
20,415
Costs related to the early repayment of debt -
17,550
Stock based compensation 3,312
3,335
Non-real estate depreciation and amortization 19,564
17,587
Straight-line revenues and amortization of below-market lease intangibles (11,022 ) (6,906 ) Maintenance capital expenditures (2,366 ) (1,976 ) Other, net (8,170 ) (3,970 ) Adjustments for equity in earnings from unconsolidated entities 296
356
Adjustments for noncontrolling interests (21 ) (818 ) AFFO attributable to common shareholders$ 112,342 $
103,102
Liquidity and Capital Resources
Our principal liquidity needs are to fund operating expenses, meet debt service obligations, fund investment activities, including capital expenditures, and make dividend distributions. Furthermore, following consummation of our settlement agreement with Windstream, including entry into the Windstream Leases, we are obligated (i) to make$490.1 million of cash payments to Windstream in equal installments over 20 consecutive quarters beginning inOctober 2020 and (ii) to reimburse Windstream for up to an aggregate of$1.75 billion for Growth Capital Improvements in long-term value accretive fiber and related assets made by Windstream through 2029. To date, we have paid$215.4 million of the$490.1 million due to Windstream under the settlement agreement, including$92.9 million that we pre-paid onOctober 14, 2021 ,$78.0 million of which was funded from a portion of the proceeds of the 2030 Notes. Uniti's reimbursement commitment for Growth Capital Improvements does not require Uniti to reimburse Windstream for maintenance or repair expenditures (except for costs incurred for fiber replacements to the CLEC MLA 38
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leased property, up to$70 million during the term), and each such reimbursement is subject to underwriting standards. Uniti's total annual reimbursement commitments for the Growth Capital Improvements under both Windstream Leases (and under separate equipment loan facilities) were limited to$125 million in 2020 and$225 million in 2021, and are limited to$225 million per year in 2022 through 2024;$175 million per year in 2025 and 2026; and$125 million per year in 2027 through 2029. Our primary sources of liquidity and capital resources are cash on hand, cash provided by operating activities (primarily from the Windstream Leases), available borrowings under our credit agreement by and among theOperating Partnership ,CSL Capital, LLC and Uniti Group Finance 2019 Inc., the guarantors and lenders party thereto andBank of America, N.A ., as administrative agent and collateral agent (the "Credit Agreement"), and proceeds from the issuance of debt and equity securities. As ofMarch 31, 2022 , we had cash and cash equivalents of$51.1 million and approximately$335.5 million of borrowing availability under our Revolving Credit Facility. Subsequent toMarch 31, 2022 , other than$10.4 million of Growth Capital Improvements (see "Result of Operations-Revenues" above), there have been no material outlays of funds outside of our scheduled interest and dividend payments. Availability under our Revolving Credit Facility is subject to various conditions, including a maximum secured leverage ratio of 5.0:1. In addition, if we incur debt under our Revolving Credit Facility or otherwise such that our total leverage ratio exceeds 6.5:1, our Revolving Credit Facility would impose significant restrictions on our ability to pay dividends. See
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