Business Strategy and Outlook Matthew Dolgin, CF A, Eq. Analyst, 10 August 2020 Uniti has been in limbo since Windstream filed for bankruptcy early in 2019, as more than half of Uniti revenue and over 80% of EBITDA come from Windstream. The agreement the two firms reached in March 2020, which was approved by the bankruptcy court and should be finalized before the end of 2020, will allow Uniti to continue on the path it was on before the Windstream uncertainty , diversifying its business while sustaining itself with reliable returns and cash flow from Windstream. Diversification has come primarily via acquisitions and fiber network construction, which spawned the firm's fiber infrastructure segment, where Uniti leases dark and lit fiber and small cells to wireless carriers and other enterprises. While we generally are skeptical about the economics of such businesses, we see Uniti as better positioned than many competitors because it focuses on second and third-tier cities, where we don't think competition is quite as intense. For example, Crown Castle explicitly says its footprint covers only the largest U.S. cities. In addition, the major cable providers in the U.S. are absent over much of Uniti's footprint. W e expect fiber use to continue growing substantially given constantly increasing data consumption across wired and wireless networks, and we think Uniti can capitalize in its niche. W e also like Uniti's leasing business, where it has engaged in sale-leaseback transactions to buy other companies' fiber and immediately lease it back at attractive rates, but we are unconvinced Leasing can materially grow beyond Windstream. W e don't think Uniti adds much value beyond providing capital, so we expect virtually any firm with access to cheap financing can compete. As such, we think suitors will compete on price, and finding sizable deals at attractive rates will be difficult. Analyst Note Matthew Dolgin, CF A, Eq. Analyst, 10 August 2020 Uniti reported good second-quarter numbers that exceeded FactSet consensus revenue and EBITDA Important Disclosure: The conduct of Morningstar’ s analysts is governed by Code of Ethics/Code of Conduct Policy , Personal Security T rading Policy (or an equivalent of), and Investment Research Policy For information regarding conflicts of interest, please visit http://global.morningstar .com/equitydisclosures Uniti Is Getting Its Business and Finances Back on T rack as It Moves Past Windstream Lease Upheaval Bulls Say O Uniti's stock is overly depressed due to bankruptcy fears. Prospects for its business are not dire given its amended lease with Windstream, which should provide a very reliable stream of cash flow and gives Uniti additional fiber capacity to lease. O Uniti's sale-leaseback transactions provide nearly 100% margins, require no spending or upkeep on Uniti's part, and lock in high-return revenue streams for periods of 15 years or longer O Less competition to provide fiber exists in the second- and third-tier cities where Uniti operates. Bears Say O Uniti is in a weak financial position, which, at best, impairs its ability to diversify its customer base and grow , and at worst makes bankruptcy risk a constant threat. O Competition for sale-leaseback transactions-- potentially Uniti's biggest area of opportunity--would likely cause returns on prospective deals to drop below the firm's cost of capital. O A depressed stock price limits Uniti's access to capital and can hamper growth and diversification, as it depends on equity issuance to fund those opportunities. Morningstar Pillars Analyst Quantitative Economic Moat None None V aluation QQQ Undervalued Uncertainty V ery High High Financial Health — Moderate Current 5-Yr A vg Sector Country Price/Quant Fair V alue 0.95 0.90 0.85 0.83 Price/Earnings — — 11.0 20.1 Forward P/E -0.8 — 14.2 13.9 Price/Cash Flow 3.4 — 13.7 13.1 Price/Free Cash Flow 8.9 — 15.6 19.5 T railing Dividend Y ield% 5.68 10.33 4.08 2.35 estimates. More importantly , the firm has taken several steps to shore up its business in the wake of its renegotiated Windstream lease. W e moved our uncertainty rating to extreme in March, when we feared the capital markets' dislocation could spoil the lease agreement Uniti had made with Windstream, which we believe is critical to enable Uniti to continue as a going concern. Now , with the agreement likely to become final this quarter after being approved by Windstream’ s bankruptcy court, and with Uniti selling some of its businesses to raise cash and focus on its core operations, we think Uniti is on firmer footing. W e are bringing our uncertainty rating back down to very high, while we’re maintaining our $10 fair value estimate. Even considering the cash payments to Windstream and the capital spending obligations Uniti will meet as part of the renegotiation, management expects Uniti will not need to raise capital through 2021. The firm completed the sale of its tower business during the second quarter for $220 million, as previously announced. W e think the tower sale was very smart since it was a drain on cash and was not strategically significant. Immediately after the quarter -ended, Uniti also sold a majority stake in one of its sale-leaseback partnerships for $168 million, a price which we would have viewed as decent even if Uniti sold the entire partnership--Uniti did not disclose how big of a stake it maintained. With fewer ancillary distractions, the more-focused business performed well in the second quarter T otal revenue was up 1% year over year , to $267 million despite what we estimate was nearly a 10% drag from the loss of one quarter of tower revenue, the wind down of Uniti’ s CLEC business, and insurance revenue in last year’ s second quarter that didn’ t recur The 76% adjusted EBITDA margin has been steady for the last few quarters. Economic Moat Matthew Dolgin, Eq. Analyst, 10 August 2020 Uniti has a compelling business and, in its very short life span, has generated good returns on invested capital. However , with virtually no track record and, in some ways, a novel business, we cannot proclaim that it has Source: Morningstar Equity Research Source: Morningstar Undervalued Fairly V alued Overvalued Quantitative V aluation u USA UNIT Morningstar Equity Analyst Report | Report as of 11 Aug 2020 02:17, UTC | Page 1 of 15 Uniti Group Inc UNIT (XNAS) Morningstar Rating Last Price Fair V alue Estimate Price/Fair V alue T railing Dividend Y ield % Forward Dividend Y ield % Market Cap (Bil) Industry Stewardship 11 Aug 2020 02:14, UTC 10 Aug 2020 13 Mar 2020 22:59, UTC 10 Aug 2020 10 Aug 2020 10 Aug 2020 QQQ 10.04 USD 10.00 USD 1.00 5.68 5.98 1.95 REIT - Specialty Standard © Morningstar 2020. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law , Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner , without the prior written consent of Morningstar Investment research is produced and issued by subsidiaries of Morningstar , Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. T o order reprints, call +1 312-696-6100. T o license the research, call +1 312-696-6869. Please see important disclosures at the end of this report. ? sustainable competitive advantages over potential competitors. W e estimate Uniti has averaged 9% ROICs in the four full years it has existed, similar to the cost of capital we estimate for the firm. W e think a couple of Uniti's business segments have moat source characteristics, but we need to see the firm execute a bit more of its plan before we can say it is likely to maintain excess returns for at least a decade. Uniti's business is primarily premised on leasing fiber to its customers. Current returns stem almost entirely from its master lease agreement, or MLA, with Windstream, which provided more than 85% of total EBITDA in 2019. While the Windstream business alone may generate sustained excess returns, we agree that it was imperative for management to diversify and reduce customer concentration. In addition to pursuing sale-leaseback transactions with similar economics to its Windstream deal, management is acquiring and building other fiber assets and wireless towers, looking to lease both to carriers and enterprises. Windstream went from composing 96% of revenue in 2015 to 68% in 2019, and Uniti is striving to cut the share to 50%. However , with the diversification comes a bigger asset base that the firm needs to similarly prove it can earn excess returns on. Uniti's leasing segment encompasses the Windstream MLA and several relatively small sale-leaseback transactions enacted since 2018. W e think these transactions are likely to lead to excess economic returns, and we see substantial switching costs associated with the deals. In each of those sale-leaseback deals, management has purchased the firms' entire network infrastructures, locked them into 15-20-year contracts at 9.3%-9.6% returns, and required the lessees to undertake 100% of spending and maintenance associated with the network. W e think it is virtually inconceivable that tenants would voluntarily break these long-term contracts, as, in addition to legal ramifications, they would have to undertake significant spending to light a substitute network, if a comparable one even existed. Further , Uniti has carved out a portion of each network for its own proprietary use, and it will own all network improvements Close Competitors Currency (Mil) Market Cap TTM Sales Operating Margin TTM/PE V erizon Communications Inc VZ USD 244,104 129,726 22.24 12.77 CenturyLink Inc CTL USD 11,919 22,019 16.71 9.61 when the leases expire, provisions that should allow returns on these deals to comfortably exceed Uniti’ s cost of capital. The biggest risk we see in the leasing segment is the potential that a tenant will be unable to uphold its end of the MLA. When Windstream went into bankruptcy , Uniti ultimately had to agree to a deal that effectively reduced its Windstream cash receipts by about 15% annually on top of making several other one-time cash and noncash considerations. With only slim excess returns existing already , such a scenario likely pushes ROICs below W ACC in the near term. Apart from renegotiation risks, we still don't believe Uniti's leasing business alone is enough to create a firmwide moat—despite the favorable economics—for two reasons: 1) the bulk of currently planned growth investment is in other business segments where returns are less certain, potentially eroding the slim excess ROICs currently in the leasing business; and 2) it is a novel business that we think other firms could copy if they chose, so we are not convinced Uniti will continue to find future deals with initial yields in excess of 9%. Uniti believes it is the only firm really engaging in this type of fiber sale-leaseback business, and we think it could be attractive, so we would not be surprised to see others follow if Uniti proves successful. Management states that in the future the leasing business may compose the bulk of Uniti's incremental spending. When that happens, and if Uniti can continue locking in attractive deals, we think it could provide the basis of a moat. Until then, we think this segment is more likely to be a contributor to a moat only if other segments develop sufficient moat sources. The other segment where we think Uniti could have competitive advantages is Fiber , where the company is acquiring and building fiber networks in second- and third-tier cities. W e believe metro fiber is increasingly important, as higher levels of data consumption and a move toward small cells and 5G technology requires it to be present over a wider swath of cities than was required in the past. Broadly , our view is that fiber in the United States is commoditized and oversupplied (largely from irrational building in the 1990s), so firms holding it don't have competitive advantages despite the surge in demand, as many players can meet the need, and therefore lack of pricing power leads to lackluster returns. Unlike all large competitors, however , Uniti has only a limited Morningstar Equity Analyst Report |Page 2 of 15 Uniti Group Inc UNIT (XNAS) Morningstar Rating Last Price Fair V alue Estimate Price/Fair V alue T railing Dividend Y ield % Forward Dividend Y ield % Market Cap (Bil) Industry Stewardship 11 Aug 2020 02:14, UTC 10 Aug 2020 13 Mar 2020 22:59, UTC 10 Aug 2020 10 Aug 2020 10 Aug 2020 QQQ 10.04 USD 10.00 USD 1.00 5.68 5.98 1.95 REIT - Specialty Standard © Morningstar 2020. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law , Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner , without the prior written consent of Morningstar Investment research is produced and issued by subsidiaries of Morningstar , Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. T o order reprints, call +1 312-696-6100. T o license the research, call +1 312-696-6869. Please see important disclosures at the end of this report. ? presence in the biggest U.S. cities, where we think competition can be especially cutthroat. W e believe new fiber construction is now rational, so to the extent a firm has a presence in an area that is not already subject to multiple competitors, we think it has efficient scale benefits. An incumbent with the bulk of a network in place can incrementally add all the capacity a market needs for far less cost than what a competitor would face in building an entire network from scratch, so we see little economic reason for a competitor to overbuild in a location with an existing network. With its assets in cities of little or no focus to big fiber holders like A T&T , V erizon, Crown Castle, and Zayo, we think Uniti could have efficient scale benefits over much of its footprint. Given the difficulty in determining every company's exact fiber footprint, we have to rely on results and returns on capital, in aggregate, to determine whether Uniti is truly operating with an efficient scale advantage in this segment. In 201 the segment composed about 30% of total revenue and posted an adjusted EBITDA margin of about 40%, both significant increases over 2016, as the firm has continued to build through acquisition. However , this acquisition activity muddies our view of the business. Once the firm gets to a steadier state, or at least finds a point where the entire segment isn't overwhelmed by each subsequent acquisition, we expect to have a clearer view of whether this business is indeed showing signs of a competitive advantage. T owers currently make up only about 2% of total revenue, and the segment has not yet produced a material profit. W e think this segment is unlikely to contribute to a moat in the foreseeable future. It faces large competitors that have advantages with existing tenants and likely lower costs, given their sizes, and management realizes as much. For example, Uniti has stated that it intends to focus on areas where it will not be competing with the likes of American T ower , Crown Castle, or SBA. If it stays true to that intention, its tower business may be productive, but it is unlikely to become very big. If it sees bigger areas of opportunity , we expect the larger players will come to compete, and we think Uniti is disadvantaged relative to them. Either way , we don't think this business can, with a competitive advantage, become big enough to contribute to a moat for Uniti as a whole. Fair V alue & Profit Drivers Matthew Dolgin, Eq. Analyst, 10 August 2020 W e are maintaining our $10 fair value estimate for Uniti following the firm’ s second-quarter results. Our fair value estimate implies a P/AFFO multiple of 6 and an EV/adjusted EBITDA multiple of 9 based on our 2020 forecast. On an organic basis, we project revenue growth to be 3%-4% annually through 2029 while EBITDA margins remain in the mid-70% range. W e expect a dip in revenue growth in 2020 after the firm winds down its T alk America residential fixed-line business and sells most of its towers. Despite management's continuing efforts to diversify its revenue base, we expect the firm’ s financial results to be extremely dependent on Windstream. W e project the leasing segment, which includes the Windstream lease, to provide little organic growth, but it will continue to have nearly 100% EBITDA margins. W e project the fiber business to grow revenue in the midsingle digits annually through 2029, resulting in the segment growing to only about one third of total company revenue by 2029, up from just over one quarter in 2018. W e expect fiber margins will continue to contract in 2020, as the firm expands its network and integrates new businesses. After that, we expect fiber adjusted EBITDA margin to gradually climb back to 2018 levels, as we expect the segment will benefit from operating leverage, since incremental costs on leasing additional fiber are minimal. W e project EBITDA margins in the segment to expand by 4 to 5 percentage points between 2020 and 2029. Risk & Uncertainty Matthew Dolgin, Eq. Analyst, 10 August 2020 W e are moving our uncertainty rating for Uniti back to very high, from extreme, as it appears the Windstream agreement will be finalized in the second half of 2020, which eases our fears about Uniti’ s ability to survive as a going concern. Even after it moves past the Windstream lease renegotiation, financial risk remains. The firm is still heavily indebted, and although we think Uniti will be able to meet its financial obligations unless disaster arises, its ability to fund growth is questionable. With a net debt/adjusted EBITDA ratio that has consistently been around 6 the past few years, we think the firm is constantly in danger of tripping debt covenants. The new Windstream should provide a certain and stable stream of cash flow Morningstar Equity Analyst Report |Page 3 of 15 Uniti Group Inc UNIT (XNAS) Morningstar Rating Last Price Fair V alue Estimate Price/Fair V alue T railing Dividend Y ield % Forward Dividend Y ield % Market Cap (Bil) Industry Stewardship 11 Aug 2020 02:14, UTC 10 Aug 2020 13 Mar 2020 22:59, UTC 10 Aug 2020 10 Aug 2020 10 Aug 2020 QQQ 10.04 USD 10.00 USD 1.00 5.68 5.98 1.95 REIT - Specialty Standard © Morningstar 2020. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law , Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner , without the prior written consent of Morningstar Investment research is produced and issued by subsidiaries of Morningstar , Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. T o order reprints, call +1 312-696-6100. T o license the research, call +1 312-696-6869. Please see important disclosures at the end of this report. ? that has historically accounted for at least 85% of EBITDA, but in the next few years Uniti will have additional cash payments it must send back to Windstream, so we think Uniti has a slim margin to avoid calamity if its business turns down or it faces another external shock. While we think the Windstream agreement eases fears that Uniti itself will end up in bankruptcy , the cash concessions and lower stock price that were the ultimate outcome of Windstream’ s bankruptcy are likely to inhibit Uniti’ s ability to grow and diversify , which had long been its plan. A key part of Uniti’ s strategy had been to issue equity to fund management’ s vision of a company more diversified from its Windstream lease. Future sale-leaseback transactions and the pace of the firm’ s fiber buildout are likely to suffer , which would impair Uniti’ s ability to grow EBITDA as fast and reduce its financial leverage. Stewardship Matthew Dolgin, Eq. Analyst, 13 March 2020 W e rate Uniti as having Standard stewardship. W e like management’ s vision and think it did a good job executing until the bankruptcy of Windstream, by far its biggest customer On the other hand, we think it has a mixed record in managing the firm’ s finances, and it is not blameless for the problems caused by the Windstream bankruptcy Despite the Windstream relationship being cemented before Uniti’ s inception, we believe both the CEO and the chairman had a hand in creating the complicated relationship with Windstream that led to the recent problems. Uniti’ s CEO is Kenny Gunderman, and its chairman is Skip Frantz. Gunderman has spent the bulk of his career as an investment banker—primarily at Lehman Brothers and Stephens—focusing on the telecommunications industry Frantz, who leads a six-person board, is a lawyer by trade who spent much of his career at Alltel, where he served as General Counsel and was responsible for that firm's merger and acquisition negotiations and government affairs. He was a member of Windstream's board until the Uniti spin-off and served as that firm's chairman from 2006 until 2010. The backgrounds of both men should serve the firm well as it looks to build its company through acquisitions—the only path through which it can achieve meaningful diversification, in our view W e believe Uniti was in the process of transforming the company from one completely tied to and reliant on Windstream, which is what it inherited, to a truly independent company W e expect that road to now be more difficult after the Windstream lease amendment, but management’ s track record has been positive. W e also believe management has shrewdly handled an equity issuance strategy that we enthusiastically support. Though management relies on issuing equity to diversify the company , it is unwilling to do so when it believes the stock is materially undervalued. In early 2018, when management felt the stock price was unjustifiably low , it funded a $200 million acquisition on its line of credit. Several months later , with the stock price above $20, the firm issued equity and paid off the credit line borrowings. Management has also expressed a reluctancy to pursue major deals when it cannot raise capital on favorable terms. However , we think the decision to continually pay an exorbitant dividend--potentially 100% in excess of what it was required to do to maintain REIT status--while its biggest customer was on financially shaky ground was ill-advised. Eschewing any financial cushion left the firm in a dire situation when Windstream lost its legal battle, and Uniti was then forced to cut its dividend because its financial position became untenable. W e think allowing that exposure to a foreseeable, even if low-probability , event was unjustifiably risky Even worse, we don't believe the firm received any incremental benefit from paying such a huge dividend, as even the dividend required to maintain REIT status would have provided the stock with a yield in the mid- to high single digits, enough to draw dividend investors. Given that Windstream sold its entire stake in Uniti shortly after the spin-off, Uniti's decision to maintain such a high dividend was not for the purpose of propping up its biggest customer Morningstar Equity Analyst Report |Page 4 of 15 Uniti Group Inc UNIT (XNAS) Morningstar Rating Last Price Fair V alue Estimate Price/Fair V alue T railing Dividend Y ield % Forward Dividend Y ield % Market Cap (Bil) Industry Stewardship 11 Aug 2020 02:14, UTC 10 Aug 2020 13 Mar 2020 22:59, UTC 10 Aug 2020 10 Aug 2020 10 Aug 2020 QQQ 10.04 USD 10.00 USD 1.00 5.68 5.98 1.95 REIT - Specialty Standard © Morningstar 2020. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law , Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner , without the prior written consent of Morningstar Investment research is produced and issued by subsidiaries of Morningstar , Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. T o order reprints, call +1 312-696-6100. T o license the research, call +1 312-696-6869. Please see important disclosures at the end of this report. ? Analyst Notes Archive Windstream's Business Continues Declining as It Looks to Exit Bankruptcy in 2020 Matthew Dolgin, Eq. Analyst, 20 February 2020 From the moment Windstream filed for bankruptcy about a year ago, we realized that existing shareholders were unlikely to realize any value, and we ceased publishing a fair value estimate. However , because we expect Windstream to restructure and ultimately issue new shares to the public, its underlying business remains important. Unfortunately for Windstream, revenue and profit deterioration continues, and the firm’ s outlook implies more of the same in 2020. The most important issue for Windstream and the valuation prospects for its restructured business remains the outcome of its lease obligation to Uniti. Once again, management provided little detail, but the firms continue to negotiate the fate of Windstream’ s $650 million annual lease payments and other lease responsibilities. A trial is scheduled to begin the first week of March if the firms don’ t come to an agreement by then. Uniti’ s stock has rallied substantially over the past couple of weeks after Windstream disclosed each side’ s most recent proposal, which showed that the two don’ t seem far apart. Common financial highlights of the proposals include Uniti buying additional assets from Windstream and then allowing Windstream to use them rent-free for 20 years; Uniti releasing Windstream from its obligation to fund capital improvements on the leased network and instead agreeing to take on the spending itself; and Windstream essentially receiving nearly $100 million in cash rebates on its lease expense in each of the next five years. While the final terms are critical for Uniti’ s shareholders, we maintain that the resolution is irrelevant for Windstream’ s current shareholders. One way or the other , we expect Windstream will continue operating on Uniti’ s network, and the financial and network ownership terms will be relevant for a next potential group of Windstream equityholders. Disappointing Q4 for Uniti but Windstream Settlement Should Provide Stability Matthew Dolgin, Eq. Analyst, 12 March 2020 Uniti fell short of our fourth-quarter revenue and EBITDA projections due to what we see as lackluster performance in its fiber infrastructure segment. However , the importance of that division pales in comparison to the leasing segment, which is now on much firmer footing following last week’ s news that Uniti and Windstream reached an agreement on the fate of their master lease agreement, which accounts for more than two thirds of Uniti’ s revenue and 85% of its EBITDA. The firms agreed to a series of terms that ultimately impact our fair value estimate similarly to the simple 25% annual payment reduction that we have been pricing in since Windstream entered bankruptcy early in 2019. However , the firm’ s strategy now seems scattershot, and its business is showing little upward momentum, so we are likely to reduce our $11 fair value estimate slightly after rolling our model to 2020. With leasing segment revenue and profit locked in and highly predictable, variability in Uniti’ s financial results stem from its fiber segment, which is the only other meaningful contributor to the top line. W e estimate fourth-quarter organic fiber revenue grew about 4% year over year Management attributes the disappointment to delayed timing of some construction projects and a purposeful de-emphasis of nonstrategic revenue. However , management’ s 2020 fiber outlook, which we estimate also implies only about 4% organic revenue growth, was also below our expectation. In addition, the 36% adjusted EBITDA margin in the quarter contracted 250 basis points from last quarter and was the worst result since 2017, which we wouldn’ t expect if sales headwinds came from de-emphasizing low-margin revenue. On the plus side, Uniti’ s $900,000 of monthly fiber recurring revenue signed in the quarter and 0.5% churn rate both were stronger than any other quarter in the last couple years and keep us from thinking our long-term projection of about 6% average annual fiber revenue growth is too optimistic. Uniti Reports a Good Q1 While Pursuing T ower Sale and Looking to Windstream Resolution Matthew Dolgin, Eq. Analyst, 11 May 2020 Multiple pieces of promising news have emerged in recent days regarding Uniti, topped off with first-quarter results that were in line with our revenue and EBITDA projections after several quarters of disappointments. W e are maintaining our $10 fair value estimate, and, for now , we are maintaining our extreme uncertainty rating. However , we think Uniti has secured a great deal to sell its tower business, and with its amended master lease agreement, or MLA, with Windstream looking more secure, Uniti’ s Morningstar Equity Analyst Report |Page 5 of 15 Uniti Group Inc UNIT (XNAS) Morningstar Rating Last Price Fair V alue Estimate Price/Fair V alue T railing Dividend Y ield % Forward Dividend Y ield % Market Cap (Bil) Industry Stewardship 11 Aug 2020 02:14, UTC 10 Aug 2020 13 Mar 2020 22:59, UTC 10 Aug 2020 10 Aug 2020 10 Aug 2020 QQQ 10.04 USD 10.00 USD 1.00 5.68 5.98 1.95 REIT - Specialty Standard © Morningstar 2020. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law , Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner , without the prior written consent of Morningstar Investment research is produced and issued by subsidiaries of Morningstar , Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. T o order reprints, call +1 312-696-6100. T o license the research, call +1 312-696-6869. Please see important disclosures at the end of this report. ? financial position looks less precarious. Once the MLA is officially resolved, we expect to moderate our uncertainty rating, which we moved to extreme specifically because of our fear that Uniti would become insolvent if its MLA with Windstream ended. On May 8, Windstream’ s bankruptcy court approved its reorganization plan, which included the new MLA that the two firms and other Windstream creditors agreed upon in March. The plan still must be confirmed, which will not happen until after creditors vote. Windstream currently has the support of most creditors, making confirmation seem likely Still, because Uniti’ s survival is critically dependent on the Windstream business, we don’ t think it can be comfortable until it’ s official. With its first-quarter earnings report, Uniti also announced that it has agreed to sell 90% of its tower business for $220 million and expects the deal to close by the end of next month. W e’ve long thought Uniti should sell its tower business, which we did not see as highly strategic or likely to be profitable, and Uniti has been in desperate need of cash. Uniti announced an alternative plan last quarter to sell a large portion of the tower portfolio for $190 million in an agreement that entailed the firm staying in the tower business while continually building and selling more towers. W e think the new deal is far superior Bankruptcy Court Confirmation of Windstream’ s Restructuring Plan Is Good News for Uniti Matthew Dolgin, Eq. Analyst, 25 June 2020 On June 25, Windstream’ s bankruptcy court approved the firm’ s restructuring plan. As we’ve thought would be likely from the onset of this process, it appears Windstream’ s equityholders will get completely wiped out. Windstream expects to re-emerge from bankruptcy as a private company by the end of the summer W e expect Windstream will have an initial public offering in the future, but our current coverage will cease when the firm goes private. As has been the case since Windstream filed for bankruptcy , we will not publish a model or fair value estimate for the worthless equity While we see today’ s development as anticlimactic for Windstream’ s shareholders, since we don’ t think the outcome was in any way dependent on plan confirmation, the resolution is welcome news for Uniti. Windstream makes up more than 60% of Uniti revenue and almost 90% of EBITDA. W e’ve believed the renegotiated master lease agreement, or MLA, which is part of the restructuring plan, is a good outcome for Uniti. However , part of the agreement entailed Windstream creditors buying Uniti stock at $6.33 per share with proceeds going to Windstream. As the stock market melted down in March, we became concerned that the deal could fall apart, and we moved our uncertainty rating for Uniti to extreme. Had the deal fallen through and Uniti been forced to renegotiate a less favorable deal, we would have likely cut our fair value estimate, and Uniti may have had to file for bankruptcy itself if no agreement was reached. W e will now re-evaluate our uncertainty rating as the bankruptcy winds down. W e are maintaining our $10 fair value estimate for Uniti. Uniti Is Getting Its Business and Finances Back on T rack as It Moves Past Windstream Lease Upheaval Matthew Dolgin, Eq. Analyst, 10 August 2020 Uniti reported good second-quarter numbers that exceeded FactSet consensus revenue and EBITDA estimates. More importantly , the firm has taken several steps to shore up its business in the wake of its renegotiated Windstream lease. W e moved our uncertainty rating to extreme in March, when we feared the capital markets' dislocation could spoil the lease agreement Uniti had made with Windstream, which we believe is critical to enable Uniti to continue as a going concern. Now , with the agreement likely to become final this quarter after being approved by Windstream’ s bankruptcy court, and with Uniti selling some of its businesses to raise cash and focus on its core operations, we think Uniti is on firmer footing. W e are bringing our uncertainty rating back down to very high, while we’re maintaining our $10 fair value estimate. Even considering the cash payments to Windstream and the capital spending obligations Uniti will meet as part of the renegotiation, management expects Uniti will not need to raise capital through 2021. The firm completed the sale of its tower business during the second quarter for $220 million, as previously announced. W e think the tower sale was very smart since it was a drain on cash and was not strategically significant. Immediately after the quarter -ended, Uniti also sold a majority stake in one of its sale-leaseback partnerships for $168 million, a price which we would have viewed as decent even if Uniti sold the entire partnership--Uniti did not disclose how big of a stake it maintained. Morningstar Equity Analyst Report |Page 6 of 15 Uniti Group Inc UNIT (XNAS) Morningstar Rating Last Price Fair V alue Estimate Price/Fair V alue T railing Dividend Y ield % Forward Dividend Y ield % Market Cap (Bil) Industry Stewardship 11 Aug 2020 02:14, UTC 10 Aug 2020 13 Mar 2020 22:59, UTC 10 Aug 2020 10 Aug 2020 10 Aug 2020 QQQ 10.04 USD 10.00 USD 1.00 5.68 5.98 1.95 REIT - Specialty Standard © Morningstar 2020. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. 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