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 six
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months ended June 30, 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 the U.S. Securities and Exchange
Commission ("SEC") on February 25, 2022, as amended by Amendment No. 1 thereto
filed on Form 10-K/A with the SEC on March 22, 2022 (the "Annual Report").
Overview
Company Description
Uniti Group Inc. (the "Company", "Uniti", "we", "us" or "our") is an
independent, 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, 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 Windstream
Holdings II, LLC, its successor in interest, and its subsidiaries, "Windstream")
pursuant to which Windstream contributed certain telecommunications network
assets, including fiber and copper networks and other real estate (the
"Distribution Systems") 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.
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
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, and Talk
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 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
June 30, 2022, we are the sole general partner of the Operating Partnership and
own approximately 99.96% of the partnership interests in the Operating
Partnership. In addition, we have undertaken a 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.
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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.
Significant Business Developments
Sale of Harmoni Towers Interest. On June 21, 2022, the Company completed the
sale of its investment in Harmoni Towers LP to Palistar Communications
Infrastructure GP LLC for total cash consideration of $32.5 million. As a result
of the transaction, during the second quarter of 2022 we recorded a pre-tax gain
of $7.9 million within other income (expense), net within our Condensed
Consolidated Statements of Income.
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