EDGAR 10-K Filing

Company CIK: 1620280
Filing Year: 2022
Filename: 1620280_10-K_2022_0001564590-22-007221.json

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ITEM 1. BUSINESS
Item 1. Business.
Overview
Uniti Group Inc. (the “Company”, “Uniti”, “we”, “us” or “our”) is an independent, internally managed real estate investment trust (“REIT”) engaged in the acquisition, construction and leasing of mission critical infrastructure in the communications industry. We are principally focused on acquiring and constructing fiber optic, copper and coaxial broadband networks and data centers.
As of December 31, 2021, Uniti and its subsidiaries own approximately 128,000 fiber network route miles, representing approximately 7.6 million fiber strand miles, approximately 230,000 route miles of copper cable lines, central office land and buildings across 44 states and beneficial rights to permits, pole agreements and easements. Refer to Part I, Item 2 “Properties” of this Annual Report on Form 10-K for a more detailed breakdown of our telecommunications properties.
For the year ended December 31, 2021, we had revenues of $1.1 billion, net income attributable to common shareholders of $122.6 million, Funds From Operations (“FFO”) of $332.8 million and Adjusted Funds From Operations (“AFFO”) of $430.3 million. Both FFO and AFFO are non-GAAP financial measures, which we use to analyze our results. Refer to Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of this Annual Report on Form 10-K for additional information regarding these non-GAAP financial measures. We have historically managed our operations as four reportable business segments (in addition to our corporate operations), but due to the sale of our former towers business (“Uniti Towers”) and wind down of our consumer competitive local exchange carrier (“CLEC”) business (the “Consumer CLEC Business”), starting in 2021, we managed our operations with a focus on our two primary businesses, Leasing and Fiber Infrastructure (which we refer to as Uniti Leasing and Uniti Fiber, respectively), which are described in more detail in Note 15 to our consolidated financial statements contained in Part II, Item 8 “Financial Statements and Supplementary Data.”
Refer to Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Overview-Significant Business Developments,” of this Annual Report on Form 10-K for information regarding significant developments in our business in 2021.
Industry
The current communications infrastructure industry is marked by the growing demand for and use of bandwidth-intensive devices and applications, such as smart devices, real-time and online streaming video, cloud-based applications, social media and mobile broadband. This growth in consumption requires the support of robust communications infrastructure, of which fiber networks and communications towers are critical components. Substantial investments have been made in recent years in fiber networks, lit services and colocation facilities to keep pace with the increased bandwidth use of both enterprise- and consumer-end users. As companies attempt to keep pace with this rapidly evolving business sector, communications infrastructure continues to increase in priority and economic importance. We believe this considerable demand creates significant opportunities for us as an operator and as a funding source for operators seeking to capitalize on these trends through build outs and acquisitions of infrastructure assets.
The wireless communications industry is a prime example of the growing importance of the bandwidth infrastructure industry. As wireless traffic and mobile data consumption continue to grow worldwide, participants in the wireless communications industry are increasing their network capacity through the development of new wireless cell sites and the addition of bandwidth capacity. Consumers are demanding network quality and coverage, and as a result, wireless carriers are making significant capital investments to improve quality, expand their coverage and remain relevant in a highly competitive industry. We expect this continued growth in capital expenditures to generate high demands for bandwidth infrastructure services.
Strategy
Our primary goal is to create long-term stockholder value by (i) generating reliable and growing cash flows, (ii) diversifying our tenant and asset base, (iii) paying a dividend and (iv) maintaining our financial strength and liquidity. To achieve this goal, we employ a business strategy that leverages our first mover advantages in the sector and our strong access to the capital markets. The key components of our business strategy are:
Acquire Additional Infrastructure Assets Through Sale Leaseback Transactions
We actively seek to acquire communications infrastructure assets from communication service providers and lease these assets back to the communication service providers on a long-term basis. We believe this type of transaction benefits the communication service providers with incremental liquidity which can be used to reduce indebtedness or for other investments, while they continue to focus on their existing business. We will employ a disciplined, opportunistic acquisition strategy and seek to price transactions appropriately based on, among other things, growth opportunities, the mix of assets acquired, length and terms of the lease, and credit worthiness of the tenant.
This strategy also is designed to expand our mix of tenants and other real property and will reduce our revenue concentration with Windstream Holdings, Inc. (“Windstream Holdings” together with Windstream Holdings II, LLC, its successor in interest, and subsidiaries, “Windstream”), our anchor tenant. We expect that this objective will be achieved over time as part of our overall strategy to acquire new distribution systems and other real property within the communications infrastructure industry to further diversify our overall portfolio.
Capitalize on the Market Demand for Increased Bandwidth Infrastructure and Performance
Bandwidth intensive devices and applications are rapidly fueling worldwide consumption of bandwidth, which in turn drives a continuously growing demand for stable and secure bandwidth options. Communications service providers and other enterprises whose services and businesses require substantial amounts of bandwidth are increasingly looking to infrastructure providers to support their bandwidth needs and to expand the reach, performance and security of their networks. We believe Uniti Fiber is well positioned to capitalize on this ongoing demand for bandwidth infrastructure solutions.
Fund Capital Extensions to Existing and New Tenants for Improvements of Infrastructure Assets
We believe the communications infrastructure industry in the United States is currently going through an upgrade cycle driven by consumers’ general desire for greater bandwidth and wireless services. These upgrades require significant capital expenditures, and we believe Uniti provides a non-competitive funding source for communication service providers to help accelerate the improvement and expansion of their networks.
We intend to support our tenant operators and other communication service providers by providing capital to them for a variety of purposes, including capacity augmentation projects, tower construction and network expansions. We expect to structure these investments as lease arrangements that produce attractive returns for Uniti. For example, under the leases with our anchor tenant, Windstream, we have agreed to fund up to $1.75 billion in value accretive upgrades to the network we lease to Windstream in exchange for an 8% return and future rental rate increases. For more information on this program with Windstream, refer to Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of this Annual Report on Form 10-K.
Facilitate M&A Transactions in the Communication Service Sector as a Capital Partner
We believe Uniti can provide cost efficient funds to potential acquirers in the communication service sector, and thereby facilitate M&A transactions as a capital partner, including by partnering with operators through use of “OpCo-PropCo” structures, pursuant to which we acquire the underlying network and other assets and the operator acquires the operations.
The highly fragmented nature of the communication service sector is expected to result in more consolidation, which we believe will provide us ample opportunity to pursue these types of transactions.
Maintain Balance Sheet Strength and Liquidity
We seek to maintain a capital structure that provides the resources and financial flexibility to position us to capitalize on strategic growth opportunities. Our access to, and cost of, external capital is dependent on various factors, including general market conditions, credit ratings on our securities, interest rates and expectations of our future business performance. We intend to maintain a strong balance sheet through disciplined use of leverage, aiming to lower our relative cost of capital over time, and continuing to have access to multiple sources of capital and liquidity. As of December 31, 2021, we had $58.9 million of unrestricted cash and cash equivalents. As of December 31, 2021, with the exception of our revolving credit facility, all of our debt was fixed-rate debt.
Competition
We compete for investments in the communications industry with telecommunications companies, investment companies, infrastructure funds, private equity funds, hedge fund investors, sovereign funds and other REITs who focus primarily on specific segments of the communications infrastructure industry. The communications infrastructure industry is characterized by a high degree of competition among a large number of participants, including many local, regional and global corporations. Some of our competitors are significantly larger and have greater financial resources and lower costs of capital than we have. In addition, revenues from our network properties are dependent, to an extent, on the ability of our operating partners, like Windstream, to compete with other communication service providers.
However, we believe we are positioned to identify and successfully capitalize on acquisition opportunities that meet our investment objectives and that we have significant competitive advantages that support our leadership position in owning, funding the construction of and leasing communications infrastructure, including:
First-Mover Advantage; Uniquely Positioned to Capitalize on Expansion Opportunities
We are the first REIT primarily focused on the acquisition and construction of mission critical infrastructure in the communications industry. We believe this provides us with a significant first-mover competitive advantage to capitalize on the large and fragmented communications infrastructure industry. Additionally, we believe our position, scale and national reach will help us achieve operational efficiencies and support future growth opportunities.
Large Scale Anchor Tenant
Windstream, as our anchor tenant, provides us with a base of rent revenues as an initial platform for us to grow and diversify our portfolio and tenant base.
Windstream provides advanced network communications and technology solutions for businesses across the United States. Windstream also offers broadband, entertainment and security solutions to consumers and small businesses primarily in rural areas. Windstream continues to operate the telecommunications network assets, including fiber and copper networks and other real estate (the “Distribution Systems”) which were contributed to us in our spin-off from Windstream in 2015 (the “Spin-off”), hold the associated regulatory licenses and own and operate other assets, including distribution systems in select states not included in the Spin-Off.
Windstream has a diverse customer base, encompassing enterprise and small business customers, carriers and consumers. The Distribution Systems we lease to Windstream are located in 37 different states across the continental United States. The fiber assets in any one state do not account for more than 20% of the total route miles in our network. We believe this geographic diversification will limit the effect of changes in any one market on our overall performance.
For a more detailed discussion of Windstream’s emergence from bankruptcy and our settlement with Windstream refer to Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Overview-Significant Business Developments,” of this Annual Report on Form 10-K.
Strong Relationships with Communication Service Providers
Members of our management team have developed an extensive network of relationships with qualified local, regional and national communication service providers across the United States. This extensive network has been built by our management team through decades of operating experience, involvement in industry trade organizations and the development of banking relationships and investor relations within the communications infrastructure industry. We believe these strong relationships will allow us to effectively source investment opportunities from communication service providers other than Windstream. We intend to work collaboratively with our operating partners in providing expansion capital at attractive rates to help them achieve their growth and business objectives. We will seek to partner with communication service providers who possess local market knowledge, demonstrate hands-on management and have proven track records.
Experienced and Committed Management Team
Our senior management team is comprised of veteran leaders with strong backgrounds in their respective disciplines. Our senior management team has extensive experience managing telecommunications operations, consummating mergers and acquisitions and accessing both debt and equity capital markets to fund growth and maintain a flexible capital structure.
Our Business
Our primary lines of business are Uniti Leasing and Uniti Fiber, which are described in further detail below. For a more detailed discussion of our other reportable segments, including our former business lines Uniti Towers and the Consumer CLEC Business, and other recent business developments related thereto refer to Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Overview-Significant Business Developments,” of this Annual Report on Form 10-K.
Uniti Leasing
Uniti Leasing is engaged in acquiring and constructing mission-critical communications assets, such as fiber, data centers, next-generation consumer broadband, coaxial and upgradeable copper, and leasing them back to anchor customers on either an exclusive or shared-tenant basis. Presently, a substantial portion of Uniti Leasing’s revenue is rental revenues from leasing the Distribution Systems to Windstream as described below in the section titled “Significant Customers”. We believe our attractive cost of capital and advantageous REIT structure will enable Uniti Leasing to provide creative and tax-efficient solutions to additional customers, including (i) sale leaseback transactions, whereby Uniti Leasing acquires existing infrastructure assets from communications service providers and leases them back on a long-term basis; (ii) capital investment financing, whereby Uniti Leasing offers communications service providers a cost-efficient method of raising funds for discrete capital investments to upgrade or expand their network; and (iii) mergers and acquisitions financing, whereby Uniti Leasing facilitates mergers and acquisition transactions as a capital partner. Results for Uniti Leasing are reported in our consolidated financial statements in our Leasing business segment.
Uniti Fiber
Uniti Fiber is a leading provider of infrastructure solutions, including cell site backhaul and small cell for wireless operators and ethernet, wavelengths and dark fiber for telecommunications carriers and enterprises. With Uniti Fiber, our goal is to capitalize on the rising demand by carriers and enterprises for dark fiber, establish ourselves as a proven small-cell systems provider and leverage wholesale enterprise opportunities as well as opportunities through the School and Libraries Program (commonly referred to as E-Rate) administered by the Universal Service Administrative Company. We believe fiber is the mission-critical focal point in the modern communications
infrastructure industry and that Uniti Fiber will accelerate our growth and diversification strategy and expand our relationships with high quality national and international wireless carriers.
At December 31, 2021, Uniti Fiber’s revenues under contract were over $1.0 billion, with a network consisting of approximately 2.7 million strand miles of fiber and approximately 26,300 customer connections. Results for Uniti Fiber are reported in our consolidated financial statements in our Fiber Infrastructure business segment.
The Company
Uniti Group Inc. was incorporated in the state of Maryland on September 4, 2014 and was separated and spun-off from Windstream on April 24, 2015.
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. We have elected to treat the subsidiaries through which we operate our fiber business, Uniti Fiber, certain aspects of our former towers business, Uniti Towers, 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 December 31, 2021, we are the sole general partner of the Operating Partnership and own approximately 99.7% of the partnership interests in the Operating Partnership. In addition, we have undertaken series of transactions to permit us to hold certain of our assets indirectly through subsidiaries that are taxed as REITs, which may also facilitate future acquisition opportunities.
Human Capital Management
On December 31, 2021, we employed 754 people, of whom 442 work directly developing and maintaining network operations, 105 in sales and sales support, 65 in shared services, 70 accounting and finance related positions and 72 in operations support roles. None of our employees are subject to a collective bargaining agreement.
Our employees are our most important resources and their success ultimately creates our own. We fuel their success by offering career growth, recognition and appreciation programs, fulfilling work relationships, empowerment, mentoring, and training and development opportunities. We demonstrate the value we place in our employees financial, physical and emotional health by providing our employees with competitive salaries, health benefits, investment opportunities, vacation options and a generous paid volunteer program, among other benefits.
For the last four years Uniti has been certified as a Great Place to Work®. Our management team strives to embody and promote our company values of united, necessary, innovative, tenacious, and integrity. As a certified Great Place to Work®, 91% of our employees say they are treated fairly and are made to feel welcome. 80% of them agree that Uniti is a great place to work. We believe our energetic and collaborative work environment is a contributing factor to our limited employee turnover and high levels of engagement.
Within our organization, we believe in unity and know that it can only be generated through connection, collaboration and respect. We are committed to fostering these ideals by hiring, developing and supporting a diverse and inclusive workplace that encourages, supports and celebrates the diverse voices of our team members. Two women sit on our board of directors and women represent approximately 22% of leadership positions across our company. A key component to our commitment includes our Diversity and Inclusion Groups (“DIGs”) which support employees and allies in various experiences including diverse backgrounds, lifestyle, characteristics, and more. Uniti currently has five active DIGs that allow for enrichment, connection and growth for our employees. Each DIG is sponsored and supported by senior leaders across the organization.
We value our strong ethical foundation and have instituted policies and procedures designed to preserve and prioritize corporate integrity. To actively promote honest, ethical and respectful conduct, we engage in a top-down approach by requiring our directors and executives to set high standards of integrity, responsibility and transparency. We insist all employees adhere to a code of conduct that sets standards for appropriate behavior and includes information on preventing, identifying, reporting and stopping any type of discrimination or unethical behavior.
As a result of the COVID-19 pandemic, we implemented safety protocols to protect our employees, customers and communities during the pandemic. These protocols include health and safety training and compliance with social distancing and other health and safety standards as required by federal, state and local government agencies, taking into consideration guidelines of the Centers for Disease Control and Prevention and other public health authorities. Many of our administrative and operational functions during this time have required modification, including some of our workforce working remotely. Our experienced teams adapted to the changes in our work environment and have managed our business successfully during this challenging time. To further support the mental health needs of our employees, we added an employer-paid virtual mental health benefit in addition to our already available Employee Assistance Program (EAP). Our EAP offers free, confidential assessments and short-term counseling to employees. Together, with our additional virtual mental health benefit, employees have the opportunity to seek in person or virtual assistance with personal and/or work-related problems. In 2021, Uniti launched Remote Work Academy which allows eligible employees primarily located within offices to enroll in a six-month virtual learning academy teaching them successful and effective business practices necessary to work remotely. Upon graduation of Remote Work Academy, employees are formally transitioned to a remote work opportunity giving them the flexibility to work from home in lieu of reporting to an office location.
Uniti will continue to seek opportunities to support the overall health and well-being of our employees as we continue to realize significant value for our stockholders, customers and communities.
Significant Customers
For the years ended December 31, 2021, 2020 and 2019, 66.4%, 65.8% and 65.0% of our revenues, respectively, were derived from leasing our Distribution Systems to Windstream Holdings.
On April 24, 2015, we were separated and spun-off from Windstream pursuant to which Windstream contributed the Distribution Systems and 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 that governs Uniti owned assets used for Windstream’s incumbent local exchange carrier (“ILEC”) operations and (b) a master lease that governs Uniti Owned assets used for Windstream’s CLEC operations. For a more detailed discussion of Windstream’s emergence from bankruptcy and our settlement with Windstream refer to Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Overview-Significant Business Developments,” of this Annual Report on Form 10-K.
Prior to its emergence from bankruptcy on September 21, 2020, Windstream was a publicly traded company 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 ended June 30, 2020 can be found at www.sec.gov. On September 22, 2020, Windstream filed a Form 15 to terminate all filing obligations under Sections 12(g) and 15(d) under the Exchange Act. Windstream’s filings are not incorporated by reference in this Annual Report on Form 10-K.
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 new 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 Annual Report on Form 10-K, Windstream is current on all lease payments. We note that in August 2020, Moody’s Investors 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 addition, in order to assist us in our continuing assessment of Windstream’s creditworthiness, we periodically receive certain confidential financial information and metrics from Windstream. Refer to Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of this Annual Report on Form 10-K for additional information regarding this assessment.
Government Regulation, Licensing and Enforcement
U.S. Telecommunications Regulatory Overview
Our subsidiaries and our tenants operate in a regulated market. As operators of telecommunications facilities and services, both we and the current and future tenants of our telecommunications assets are typically subject to extensive and complex federal, state and local telecommunications laws and regulations. The Federal Communications Commission (“FCC”) regulates the provision of interstate and international telecommunications services, and state public utility commissions (“PUCs”) regulate intrastate telecommunications services. Federal and state telecommunications laws and regulations are wide-ranging, and violations of them can subject us and our tenants to civil, criminal and administrative sanctions. We expect that the telecommunications industry, in general, will continue to face increased regulation. Changes in laws and regulations and violations of federal or state laws or regulations by us or our tenants could have a significant direct or indirect effect on our operations and financial condition, as detailed below and set forth under “Risk Factors-Risks Related to Our Business.”
Our operations require that certain of our subsidiaries across all segments hold licenses or other forms of authorization from the FCC and state PUCs in those states where we operate, and in some jurisdictions our subsidiaries must file tariffs or other price lists describing their rates, terms and conditions of the services they provide. The FCC and PUCs can modify or terminate a service provider’s license or other authority to provide telecommunications services for failure to comply with applicable laws and regulations. The FCC and PUCs may also investigate our subsidiaries’ operations and may impose fines or other penalties for violations of the same. In addition, our subsidiaries are required to submit periodic reports to the FCC and PUCs documenting their revenues and other data. Some of this information is used as the basis for the imposition of various regulatory fees and other assessments. In order to engage in certain transactions in some jurisdictions, including changes of control, the encumbrance of certain assets, the issuance of securities, the incurrence of indebtedness, the guarantee of indebtedness of other entities, including subsidiaries of ours, and the transfer of assets, we may be required to provide notice and/or obtain prior approval from certain governmental agencies. Failure to obtain required approvals could subject us to fines or other penalties.
Our subsidiaries are subject to a number of federal and state regulations that govern the way we can conduct our business. Such regulations also impose certain operating costs on our businesses. These regulations can include restrictions on pricing flexibility for certain products, minimum service quality standards, service reporting, intercarrier compensation, contributions to universal service, and other obligations. Further, the relaxation of regulatory requirements on our competitors, such as those granting us access to incumbent local exchange carrier facilities and/or services or the prices that such carriers may charge for such services or access to their facilities, may also have a detrimental effect on the businesses of our subsidiaries and/or tenants.
We have sought to structure the operations for our core real estate business in a manner to minimize the likelihood that we may be required to become regulated as a public utility or common carrier by the FCC or PUCs, but a number of our business operations are nonetheless subject to federal, state, and local regulation, and we cannot guarantee that our core real estate business will not become further subject to federal, state, and local regulation in the future.
With respect to the broadband internet services that we provide, traditionally, the FCC has recognized that broadband internet access services are “information services” subject to limited regulation. In 2015, the FCC issued a “network neutrality” decision that declared broadband internet access services to be subject to certain “telecommunications services” regulation under Title II of the Communications Act of 1934. These regulations would have limited the ways that broadband internet access service providers could structure business arrangements and manage their networks and spurred additional restrictions, including rate regulation, which could adversely affect broadband investment and innovation. In 2017, the FCC voted to return broadband internet access service to its prior classification as “information services.” As a result of these decisions, state legislators and governors have introduced, and in some cases passed, state laws and executive orders requiring different levels of adherence to “network neutrality” principles for broadband internet access service providers active in the applicable states. As a result of these laws and regulations, it is unclear at this time how broadband services will be regulated in the future, and the potential impact those regulations may have on our broadband internet service business.
Communications towers owned by our subsidiaries are subject to federal, state and local regulatory requirements with respect to the registration, siting, construction, lighting, marking and maintenance. In the United States, the construction of new towers or modifications to existing towers may require pre-approval by the FCC and the Federal Aviation Administration (“FAA”), depending on factors such as tower height and proximity to public airfields. Towers requiring pre-approval must be registered with the FCC and maintained in accordance with FCC and FAA standards. Non-compliance with applicable tower-related requirements may lead to monetary penalties or site deconstruction orders.
Towers are also subject to zoning restrictions and restrictive covenants imposed by local authorities or community organizations. While these regulations vary, they typically require approval from local authorities or community standards organizations prior to tower construction or the addition of a new antenna to an existing tower. Opposition by local zoning authorities and community residents can delay or prevent new tower construction or site upgrade projects, thereby increasing the costs and timing of new tower construction and modifications or site upgrades.
The failure to properly maintain towers pursuant to applicable regulatory requirements, such as but not limited to, lighting, painting, and other safety standards, can subject us to significant enforcement actions, including monetary penalties both within the United States and abroad.
Uniti Fiber
Our subsidiaries that compose Uniti Fiber own and operate significant fiber and other communications backhaul facilities throughout various regions of the United States. The provision of such services is often subject to FCC and PUC licensure in many jurisdictions, and the companies are typically licensed as CLECs and/or interexchange carriers in those states where they operate. The companies also hold various FCC wireless licenses in order to provide microwave backhaul and other wireless services. Because of the nature of the licenses that these companies hold, and the nature of the services that they provide, they are subject to various federal and state regulatory requirements, including, but not limited to, revenue and other reporting requirements and tariffing requirements. The companies must also maintain their wireless licenses with the FCC, which requires construction and notification reporting and other regulatory requirements. New fiber network construction is also subject to certain state and local governmental permitting and licensing requirements. Delays in the local and state permitting process can delay the construction of new facilities. Failure to abide by permit requirements can subject the company to fines and other penalties.
In some cases, our subsidiaries that compose Uniti Fiber utilize services or facilities of incumbent local exchange carriers through arrangements established under the Telecommunications Act of 1996 and FCC regulations. The FCC has recently issued orders allowing ILECs to stop offering such elements and/or to increase the rates that they may charge competitive providers for access to such elements. The loss of these elements, or significant price increases associated with our use of such elements, may increase our costs to maintain and construct new network facilities to replace those we may no longer access, or have other negative effects on our business such as a loss of ability to continue to provide services to certain customers.
Regulatory Changes
Future revenues, costs, and capital investment in the communication businesses of our tenants, Uniti Fiber, and other related entities could be adversely affected by material changes to, or decisions regarding applicability of, government requirements, including, but not limited to, changes in rules governing inter-carrier compensation, interconnection access to network facilities, state and federal universal service fund (“USF”) support, rules governing the prices that can be charged for business data services, infrastructure location and siting rules, access to unbundled network elements, and other requirements. Federal and state communications laws and regulations may be amended in the future, and other new laws and regulations may affect our business. In addition, certain laws and regulations applicable to us and our competitors may be, and have been, challenged in the courts and could be vacated or modified at any time. We cannot predict future developments or changes to the regulatory environment or the impact such developments or changes would have on our business.
In addition, regulations could create significant compliance costs for us. Delays in obtaining FCC and PUC certifications and regulatory approvals could cause us to incur substantial legal and administrative expenses, and conditions imposed in connection with such approvals could adversely affect the rates that we are able to charge our customers. Both our subsidiaries and our tenants may also be affected by legislation and/or regulation imposing new or additional obligations related to, for example, law enforcement assistance, cyber-security protection, intellectual property rights protections, environmental protections, consumer privacy, tax, or other areas. We cannot predict how any such future changes may impact our business, or the business of our tenants.
Environmental Matters
A wide variety of federal, state and local environmental and occupational health and safety laws and regulations affect telecommunications operations and facilities. These laws and regulations, and their enforcement, involve complex and varied requirements, and many such laws and regulations impose strict liability for violations. Some of these federal, state and local laws may directly impact us. Under various federal, state and local environmental laws, ordinances and regulations, an owner of real property, such as us, may be liable for the costs of removal or remediation of hazardous or toxic substances at, under or disposed of in connection with such property, as well as other potential costs relating to hazardous or toxic substances (including government fines and damages for injuries to persons and adjacent property). The cost of any required remediation, removal, fines or personal property damages and the owner’s liability therefore could exceed or impair the value of the property and/or the assets of the owner. In addition, the presence of such substances, or the failure to properly dispose of or remediate such substances, may adversely affect the owner’s ability to sell or rent such property or to borrow using such property as collateral, which, in turn, could reduce revenues.
Insurance
We maintain, or will require in our leases (including the Windstream Leases) that our tenants maintain, applicable lines of insurance on our properties and their operations. Under the Windstream Leases, Windstream has the right to self-insure or use a captive provider with respect to its insurance obligations. We believe that the amount and scope of insurance coverage provided by our policies and the policies maintained by our tenants are customary for similarly situated companies in the telecommunications industry. However, our tenants may elect not to, or be able to, maintain the required insurance coverages, and the failure by any of them to do so could have a material adverse effect on us. We may not continue to require the same levels of insurance coverage under our leases, including the Windstream Leases, and such insurance may not be available at a reasonable cost in the future or fully cover all losses on our properties upon the occurrence of a catastrophic event. Moreover, we cannot guarantee the future financial viability of the insurers.
Available Information
Our principal executive offices are located at 2101 Riverfront Drive, Suite A, Little Rock, AR 72202 and our telephone number is (501) 850-0820. We maintain a website at www.uniti.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available on our website, free of charge, as soon as reasonably practicable after we electronically file such materials with, or furnish them to, the Securities and Exchange Commission. Our Exchange Act filings can also be found at www.sec.gov.
Current copies of our Code of Business Conduct and Ethics & Whistleblower Policy, Corporate Governance Guidelines, and the charters for our Audit, Compensation and Governance Committees are posted in the “Corporate Governance” section of the About Us page of our website at www.uniti.com.

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors.
Risks Related to Our Business
The COVID-19 pandemic, and the future outbreak of other highly infectious or contagious diseases, could disrupt the operation of our business resulting in adverse impacts to our financial condition, results of operations, and cash flow.
The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets, and another pandemic in the future could do the same. Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the impact of COVID-19 and new emerging variants may have on us, and there is no guarantee that efforts by us, designed to address adverse impacts of COVID-19, will be effective.
In response to the COVID-19 pandemic, federal, state, and local governments adopted certain policies and initiatives including travel restrictions, stay at home policies, temporary business closures, social distancing and vaccination requirements. While many of these measures have been loosened, the ongoing pandemic and COVID-19 outbreaks have resulted in, and may continue to result in, reinstating these measures or implementing new or additional measures. While we have been able to navigate workplace restrictions and limitations with minimal disruptions to our business operations to date, we may be required to further modify our business practices in response to further government policies and initiatives or other negative impacts in response to the ongoing COVID-19 pandemic and new emerging variants.
Although our businesses are considered essential, the current COVID-19 pandemic, or a future pandemic, could have material and adverse effects on our ability to successfully operate and on our financial condition, results of operations and cash flows due to, among other factors:
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significant disruptions or delays in our operations or network performance, as well as network maintenance and construction, testing, supervisory and customer support activities, and inventory and supply procurement;
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increases in operating costs, inventory shortages and/or a decrease in productivity related to travel bans, social distancing efforts, vaccine mandates that may delay construction activities or require our vendor and contractors to incur additional costs that may be passed onto us;
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delays in permitting activities due to the shutdown of local permitting authorities;
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a deterioration in our ability to operate in affected areas or delays in the supply of products or services to us from vendors that are needed for our efficient operations could adversely affect our operations;
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the impact on our contracts with customers and suppliers, including potential disputes over whether COVID-19 constitutes a force majeure event;
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adverse impact on the timing of installs in our enterprise and wholesale customer segments at Uniti Fiber;
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a general reduction in business and economic activity may severely impact our clients’ financial condition and liquidity and may cause them to be unable to meet their obligations to us in full, or at all, or to otherwise seek modifications of such obligations;
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difficulty accessing debt and equity capital on attractive terms, or at all, and a severe disruption and instability in the global financial markets or deteriorations in credit and financing conditions may affect
our access to capital necessary to fund business operations or address existing and anticipated liabilities on a timely basis; and
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the potential negative impact on the health of our personnel, particularly if a significant number of them are impacted, could result in a deterioration in our ability to ensure business continuity during a disruption.
We have implemented policies and procedures designed to mitigate the risk of adverse impacts of the COVID-19 pandemic, or a future pandemic, on our operations, but we may incur additional costs to ensure continuity of business operations caused by COVID-19, or other future pandemics, which could adversely affect our financial condition and results of operations. However, the extent of such impacts will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and actions taken to contain COVID-19 or its impact, among others.
We expect the settlement with Windstream may require us to raise significant additional capital.
We expect to raise capital to fund obligations to Windstream, including (i) $490.1 million of settlement payments payable over time (of which $269.6 million remains to be paid as of December 31, 2021) and (ii) an aggregate of up to $1.75 billion for certain growth capital improvements in long-term value accretive fiber and related assets made by Windstream (or other applicable tenant) to certain ILEC and CLEC properties (the “Growth Capital Improvements”) subject to the Windstream Leases (although such investments will lead to higher rent payments). We will closely monitor capital 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; any limitations imposed by our current credit arrangements; and overall market conditions. If we are unable to access the capital markets as we anticipate (including because our cost of capital is higher than the returns we will get on our investment in Windstream), we would be subject to a shortfall in liquidity in the future which could lead to a reduction in our capital expenditures and/or dividends and, in an extreme case, our ability to pay our debt service obligations. If this shortfall occurs rapidly and with little or no notice, it could limit our ability to address the shortfall on a timely basis.
We are dependent on Windstream to make payments to us under the Windstream Leases, and an event that materially and adversely affects Windstream’s business, financial position or results of operations could materially and adversely affect our business, financial position or results of operations.
Windstream is the lessee of the Distribution Systems pursuant to the Windstream Leases and, therefore, is presently the source of a substantial portion of our revenues. There can be no assurance that Windstream will have sufficient assets, income and access to financing to enable it to satisfy its payment and other obligations under the Windstream Leases. In recent years, Windstream has experienced annual declines in its total revenue, sales and cash flow and has undergone a restructuring under Chapter 11 of the U.S. Bankruptcy Code.
The inability or unwillingness of Windstream to meet its rent obligations under the Windstream Leases could materially adversely affect our business, financial position or results of operations, including our ability to pay dividends to our stockholders as required to maintain our status as a REIT. The inability of Windstream to satisfy its other obligations under the Windstream Leases, such as the payment of insurance, taxes and utilities, could materially and adversely affect the condition of the Distribution Systems as well as the business, financial position and results of operations of Windstream. In addition, Windstream will be dependent on distributions from its subsidiaries in order to satisfy the payment obligations under the Windstream Leases, as such, if its subsidiaries were to experience a material and adverse effect on their business, financial position or results of operations, our business, financial position or results of operations could also be materially and adversely affected.
Failure by Windstream to comply with the terms of the Windstream Leases or to comply with the regulations to which the Distribution Systems are subject could require us to find another lessee for such Distribution Systems, or a portion thereof, and there could be a decrease or cessation of rental payments by Windstream.
There is no assurance that we would be able to lease the Distribution Systems to another lessee on substantially equivalent or better terms than the Windstream Leases, or at all, successfully reposition the Distribution Systems for other uses or sell the Distribution Systems on terms that are favorable to us. It may be more difficult to find a replacement tenant for a telecommunications property than it would be to find a replacement tenant for a general commercial property due to the specialized nature of the business. Even if we are able to find a suitable replacement tenant for the Distribution Systems, transfers of operations of communication distribution systems are subject to regulatory approvals not required for transfers of other types of commercial operations, which may affect our ability to successfully transition the Distribution Systems.
We may be unable to renew the Windstream Leases on commercially attractive terms or at all.
The initial term of the Windstream Leases expires on April 30, 2030. There can be no assurance that Windstream will renew the Windstream Leases upon their expiration. See “-We are dependent on Windstream to make payments to us under the Windstream Leases, and an event that materially and adversely affects Windstream’s business, financial position or results of operations could materially and adversely affect our business, financial position or results of operations.”
If Windstream elects to renew the Windstream Leases, we and Windstream will need to reach a mutual agreement on the rent for the renewal term. The Windstream Leases require that the renewal rent be “Fair Market Rent,” and if we and Windstream are unable to agree on that amount, the renewal Fair Market Rent will be determined by an independent appraisal process. If the current rent payable by Windstream exceeds the Fair Market Rent at the time of renewal, then the renewal term rent will be lower than the current rent payable by Windstream. We are confident that any renewal will be at a rate reflecting fair value and should be at an amount that will at least approximate current rent amounts, but we can provide no assurance as to the outcome of any negotiation or appraisal process. Any significant decrease in the renewal rent of the Windstream Leases could have a material adverse effect on our results of operations, financial condition and future prospects.
If the Spin-Off, together with certain related transactions, fails to qualify as a tax-free transaction for U.S. federal income tax purposes, both we and Windstream could be subject to significant tax liabilities and, in certain circumstances, we could be required to indemnify Windstream for material taxes pursuant to indemnification obligations under the tax matters agreement entered into in connection with the Spin-Off.
Windstream received a private letter ruling (the “IRS Ruling”) from the Internal Revenue Service (the “IRS”) to the effect that, on the basis of certain facts presented and representations and assumptions set forth in the request submitted to the IRS, the Spin-Off will qualify as tax-free under Sections 355 and 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended (the “Code”). Although a private letter ruling from the IRS generally is binding on the IRS, if the factual representations and assumptions made in the letter ruling request are untrue or incomplete in any material respect, then Windstream will not be able to rely on the IRS Ruling. In addition, the IRS Ruling does not address certain requirements for tax-free treatment of the Spin-Off under Sections 355 and 368(a)(1)(D) of the Code and Windstream’s use of Uniti indebtedness and common stock to retire certain of Windstream’s indebtedness (the “debt exchanges”). Accordingly, the Spin-Off was conditioned upon the receipt by Windstream of a tax opinion from its counsel with respect to the requirements on which the IRS did not rule, which concluded that such requirements also should be satisfied. The tax opinion was based on, among other things, the IRS Ruling, then current law and certain representations and assumptions as to factual matters made by Windstream and us. Any change in currently applicable law, which may or may not be retroactive, or the failure of any factual representation or assumption to be true, correct and complete in all material respects, could adversely affect the conclusions reached in the tax opinion. In addition, the tax opinion is not binding on the IRS or the courts, and the IRS or the courts may not agree with the tax opinion.
If the Spin-Off were determined to be taxable, Windstream would recognize taxable gain. Under the terms of the tax matters agreement entered into with Windstream in connection with the Spin-Off (the “Tax Matters Agreement”), we are generally responsible for any taxes imposed on Windstream that arise from the failure of the Spin-Off and the debt exchanges to qualify as tax-free for U.S. federal income tax purposes, within the meaning of Section 355 and Section 368(a)(1)(D) of the Code, as applicable, to the extent such failure to qualify is attributable to certain actions, events or transactions relating to our stock, indebtedness, assets or business, or a breach of the relevant representations or any covenants made by us in the Tax Matters Agreement, the materials submitted to the IRS in
connection with the request for the IRS Ruling or the representations provided in connection with the tax opinion. Our indemnification obligations to Windstream are not limited by any maximum amount and such amounts could be substantial. If we are required to indemnify Windstream under the circumstances set forth in the Tax Matters Agreement, we may also be subject to substantial tax liabilities.
In addition, if the Spin-Off or the debt exchanges failed to qualify as tax free for U.S. federal income tax purposes, Windstream may incur significant tax liabilities that could materially affect Windstream’s ability to make payments under the Windstream Leases.
Our level of indebtedness could materially and adversely affect our financial position, including reducing funds available for other business purposes and reducing our operational flexibility.
As of December 31, 2021, we had outstanding long term indebtedness of approximately $5.18 billion consisting of senior notes and a revolving credit facility provided by a syndicate of banks and other financial institutions, which, as of December 31, 2021, provided for an aggregate committed amount of borrowings up to approximately $560.5 million. Subject to the restrictions set forth in our debt agreements, our board of directors may establish and change our leverage policy at any time without stockholder approval. Any significant additional indebtedness could require a substantial portion of our cash flow to make interest and principal payments due on our indebtedness. Greater demands on our cash resources may reduce funds available to us to pay dividends, make capital expenditures and acquisitions, or carry out other aspects of our business strategy. Increased indebtedness can also limit our ability to adjust rapidly to changing market conditions, make us more vulnerable to general adverse economic and industry conditions and create competitive disadvantages for us compared to other companies with relatively lower debt levels. Increased future debt service obligations may limit our operational flexibility, including our ability to acquire assets, finance or refinance our assets or sell assets as needed, and our ability to pay dividends. Please see Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Credit Agreement” for information about the terms of the limited waiver we received from the lenders to our Credit Agreement.
We anticipate that we will have sufficient access to liquidity to fund our cash needs; if we are unable to do so, we would need to reduce our spending and it could have an adverse effect on us.
We anticipate continuing to invest in our network infrastructure across our Uniti Leasing and Uniti Fiber portfolios. We anticipate declaring dividends for the 2022 tax year to comply with our REIT distribution requirements. We also expect the need to raise capital to finance the Settlement, which includes growth capital investments, with Windstream. We anticipate that we will partially finance these needs, together with operating expenses (including our debt service obligations) from our cash on hand and cash flows provided by operating activities. However, we may need to access the capital markets to generate additional funds in an amount sufficient to fund our business operations, announced investment activities, capital expenditures, debt service and distributions to our shareholders. We are closely monitoring the 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 would be subject to a shortfall in liquidity in the future which could lead to a reduction in our capital expenditures and/or dividends and, in an extreme case, our ability to pay our debt service obligations. If this shortfall occurs rapidly and with little or no notice, it could limit our ability to address the shortfall on a timely basis.
We intend to pursue acquisitions of additional properties and seek other strategic opportunities, which may result in the use of a significant amount of management resources or significant costs, and we may not fully realize the potential benefits of such transactions.
We intend to pursue acquisitions of additional properties and seek acquisitions and other strategic opportunities. Accordingly, we currently are, and expect in the future to be, engaged in evaluating potential transactions and other strategic alternatives. Although there is uncertainty that any of these discussions will result in definitive
agreements or the completion of any transaction, we may devote a significant amount of our management resources to such a transaction, which could negatively impact our operations. We may incur significant costs in connection with seeking acquisitions or other strategic opportunities regardless of whether the transaction is completed. In the event that we consummate an acquisition or strategic alternative in the future, there is no assurance that we would fully realize the potential benefits of such a transaction. Integration may be difficult and unpredictable, and acquisition-related integration costs, including certain non-recurring charges, could materially and adversely affect our results of operations. Moreover, integrating assets and businesses may significantly burden management and internal resources, including the potential loss or unavailability of key personnel. If we fail to successfully integrate the assets and businesses we acquire, we may not fully realize the potential benefits we expect, and our operating results could be adversely affected.
Reports of a potential sale of the business may interfere with our business and harm our results of operations.
Media outlets have recently reported that certain unaffiliated third parties are interested in acquiring us. There can be no assurance that any such transaction will occur. We generally do not confirm or deny rumors, and we also do not generally announce negotiations or discussions until definitive documentation has been executed. Such rumors and any related actions taken by third parties could adversely affect our business, as responding to such reports and activity can be costly and time-consuming, disruptive to our operations and divert the attention of management and our employees. Moreover, such reports and activities may create perceived uncertainties among current and potential customers, employees and other constituencies as to our future direction, which could result in the loss of business opportunities and make it more difficult to attract and retain qualified personnel. In addition, any perception of a possible transaction may cause significant fluctuations in our stock price that do not necessarily reflect the underlying fundamentals and prospects of our business.
We are dependent on the communications industry and may be susceptible to the risks associated with it, which could materially adversely affect our business, financial position or results of operations.
As the owner, lessor and provider of communications services and distribution systems serving the communications industry, we are impacted by the risks associated with the communications industry. Therefore, our success is to some degree dependent on the communications industry, which could be adversely affected by economic conditions in general, changes in consumer trends and preferences, changes in communications technology designed to enhance the efficiency of communications distribution systems (including lit fiber networks and wireless equipment), and other factors over which we and our tenants have no control. As we are subject to risks inherent in substantial investments in a single industry, a decrease in the communications business or development and implementation of any such new technologies would likely have an adverse effect on our revenues.
Our business is subject to government regulations and changes in current or future laws or regulations could restrict our ability to operate our business in the manner currently contemplated.
Our business, and that of our tenants, is subject to federal, state and local regulation. In certain jurisdictions these regulations could be applied or enforced retroactively. Local zoning authorities and community organizations are often opposed to construction in their communities and these regulations can delay, prevent or increase the cost of new distribution system construction and modifications, thereby limiting our ability to respond to customer demands and requirements. Existing regulatory policies may materially and adversely affect the associated timing or cost of such projects and additional regulations may be adopted which increase delays or result in additional costs to us, or that prevent such projects in certain locations. These factors could materially and adversely affect our business, results of operations or financial condition. For more information regarding the regulations we are subject to, please see the section entitled “Business - Government Regulation, Licensing and Enforcement.”
Any further impairment of our goodwill would negatively impact our financial condition and operating results.
Goodwill represents the excess of cost over the fair value of net assets acquired in business combinations. Impairment may result from significant changes in the manner of use of the acquired assets, negative industry or economic trends and/or any changes in key assumptions regarding our fair value. In 2020 and 2021, the COVID-19 pandemic and supply chain disruptions contributed to significant financial market volatility. The extent to which the fair value of net assets acquired in business combinations is ultimately impacted will depend on numerous evolving
factors that are presently uncertain and which we may not be able to predict. Although we assess potential impairment of our goodwill on an annual basis, the ongoing impact of the COVID-19 pandemic may cause us to perform an interim analysis of our goodwill and cause us to report an impairment charge in the future, which could have a significant adverse impact on our reported earnings. At December 31, 2021, we had $601.9 million of goodwill on our consolidated balance sheet. For a discussion of our goodwill impairment testing, see “Note 3. Summary of Significant Accounting Policies-Goodwill” to our consolidated financial statements in Part II, Item 8 “Financial Statements and Supplementary Data” and “Critical Accounting Policies-Evaluation of Goodwill Impairment” in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K.
We or our tenants may experience uninsured or underinsured losses, which could result in a significant loss of the capital we have invested in a property, decrease anticipated future revenues or cause us to incur unanticipated expenses.
The Windstream Leases require, and we expect that additional lease agreements that we enter into will require, that the tenant maintain comprehensive insurance and hazard insurance or self-insure its insurance obligations. However, there are certain types of losses, generally of a catastrophic nature, such as earthquakes, hurricanes and floods that may be uninsurable or not economically insurable. Insurance coverage may not be sufficient to pay the full current market value or current replacement cost of a loss. Inflation, changes in ordinances, environmental considerations, and other factors also might make it infeasible to use insurance proceeds to replace the property after such property has been damaged or destroyed. Under such circumstances, the insurance proceeds received might not be adequate to restore the economic position with respect to such property.
In addition, even if damage to our properties is covered by insurance, a disruption of business caused by a casualty event may result in loss of revenue for our tenants or us. Any business interruption insurance may not fully compensate them or us for such loss of revenue. If one of our tenants experiences such a loss, it may be unable to satisfy its payment obligations to us under its lease with us.
We rely on information technology in our operations, and any material failure, inadequacy, interruption or security failure of that technology could harm our business.
We rely on information technology networks and systems, including the internet, to process, transmit and store electronic information and to manage or support a variety of our business processes, including financial transactions and maintenance of records. We rely on commercially available systems, software, tools and monitoring to provide security for processing, transmitting and storing confidential information. Although we have taken steps to protect the security of the data maintained in our information systems, it is possible that our security measures will not be able to prevent the systems’ improper functioning, or the improper disclosure of information in the event of cyber-attacks. Physical or electronic break-ins, computer viruses, attacks by hackers and similar security breaches, can create system disruptions, shutdowns or unauthorized disclosure of confidential information. Any failure to maintain proper function, security and availability of our information systems could interrupt our operations, damage our reputation, subject us to liability claims or regulatory penalties and could materially and adversely affect us.
Additionally, due to the ongoing COVID-19 pandemic, many of our employees may still be working remotely from their homes for the foreseeable future, which could have the effect of exacerbating any of the foregoing risks. While we have taken steps to ensure the security of our data and to prevent security breaches, many of these measures are being deployed for the first time on a widespread and sustained basis, and there is no guarantee the data security and privacy safeguards we have put in place will be completely effective or that we will not encounter some of the common risks associated with employees accessing Company data and systems remotely. As a result, we may be required to expend significant capital and other resources to protect against security breaches or to alleviate problems caused by security breaches.
Any failure of Uniti Fiber’s physical infrastructure or services could lead to significant costs and disruptions.
Uniti Fiber’s business depends on providing customers with highly reliable service. The services provided are subject to failure resulting from numerous factors, including human error, power loss, improper maintenance, physical or electronic security breaches, fire, earthquake, hurricane, flood and other natural disasters, water damage,
the effect of war, terrorism and any related conflicts or similar events worldwide, and sabotage and vandalism. Problems within Uniti Fiber’s networks or facilities, whether within our control or the control of third-party providers, could result in service interruptions or equipment damage. We may not be able to efficiently upgrade or change Uniti Fiber’s networks or facilities to meet new demands without incurring significant costs that we may not be able to pass on to customers. Given the service guarantees that may be included in Uniti Fiber’s agreements with customers, such disruptions could result in customer credits; however, we cannot assume that customers will accept these credits as compensation in the future, and we may face additional liability or loss of customers.
Unforeseen events could adversely affect our operations, business, and reputation
We could be negatively impacted by other unforeseen events, such as extreme weather events, natural disasters (including as a result of any potential effects of climate change), acts of vandalism, or outbreak of other highly infectious or contagious diseases. There is increasing concern that global climate change is occurring and could result in increased frequency of certain types of natural disasters and extreme weather events. We cannot predict with certainty the rate at which climate change is occurring or the potential direct or indirect impacts of climate change to our business. Any such unforeseen events could, among other things, damage or delay deployment of our communication infrastructure, interrupt or delay service to our tenants or could result in legal claims or penalties, disruption in operations, damage to our reputation, negative market perception, or costly response measures, which could adversely affect our business.
Risks Related to the Status of Uniti as a REIT
If we do not qualify as a REIT, or fail to remain qualified as a REIT, we will be subject to U.S. federal income tax as a regular corporation and could face a substantial tax liability, which could reduce the amount of cash available for distribution to our stockholders and to service debt.
We operate as a REIT for U.S. federal income tax purposes, as does one of our principal operating subsidiaries. Our qualification as a REIT will depend on our satisfaction of certain highly technical and complex asset, income, organizational, distribution, stockholder ownership and other requirements, including at the level of our subsidiary REIT, on a continuing basis. Our ability to satisfy the asset tests depends upon our analysis of the characterization and fair market values of our assets, some of which are not susceptible to a precise determination and for which we may not obtain independent appraisals.
If we or our subsidiary REIT were to fail to qualify as a REIT in any taxable year, unless certain relief provisions apply, we would be subject to U.S. federal income tax on all of our taxable income at regular corporate rates and dividends paid to our stockholders would not be deductible by us in computing our taxable income. As a result, we would no longer be required to pay dividends in order to qualify to be taxed as a REIT, and we could decide to reduce the amount of dividends we pay to our stockholders. Any resulting corporate liability could be substantial and could reduce the amount of cash available for distribution to our stockholders, which in turn could have an adverse impact on the value of our common stock and to service debt. Unless we were entitled to relief under certain Code provisions, we also would be disqualified from re-electing to be taxed as a REIT for the four taxable years following the year in which we failed to qualify as a REIT.
In addition, our 7.875% senior secured notes due 2025 presently limit our ability to make cash distributions to our shareholders in amounts exceeding 90% of our good faith estimate, as of the date on which the first quarterly dividend for the relevant year is declared, of our REIT taxable income for such year, determined without regard to the dividends paid deduction and excluding any capital gains, until we reduce our net leverage ratio. As a result, we may be required to record a provision in our Consolidated Financial Statements for U.S. federal income taxes related to the activities of the REIT and its passthrough subsidiaries for any undistributed income. We are subject to the statutory requirements of the locations in which we conduct business, and state and local income taxes are accrued as deemed required in the best judgment of management based on analysis and interpretation of respective tax laws.
Legislative or other actions affecting REITs could have a negative effect on us.
The rules dealing with federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Department of the Treasury (“Treasury”). Changes to the tax laws affecting REITs or TRSs, which may have retroactive application, could adversely affect our stockholders or us. We cannot predict how changes in the tax laws might affect our stockholders or us. Accordingly, we cannot provide assurance that new legislation, Treasury regulations, administrative interpretations or court decisions will not significantly affect our ability to remain qualified as a REIT, the federal income tax consequences of such qualification, the determination of the amount of REIT taxable income or the amount of tax paid by our TRSs.
We could fail to qualify as a REIT if income we receive from lease transactions, such as income from Windstream pursuant to the Windstream Leases, is not treated as qualifying income.
Under applicable provisions of the Code, we will not be treated as a REIT unless we satisfy various requirements, including requirements relating to the sources of our gross income. Rents received or accrued by us from Windstream or other lessees will not be treated as qualifying rent for purposes of these requirements if the relevant lease is not respected as a “true lease” for U.S. federal income tax purposes and is instead treated as a service contract, joint venture or some other type of arrangement. If any of our leases, including the Windstream Leases, are not respected as a true lease for U.S. federal income tax purposes, we may fail to qualify as a REIT.
REIT distribution requirements could adversely affect our ability to execute our business plan.
We generally must qualify as a REIT and distribute annually at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gains, for the U.S. federal corporate income tax not to apply to earnings that we distribute (assuming that certain other requirements are also satisfied). To the extent that we satisfy this distribution requirement and qualify for taxation as a REIT but distribute less than 100% of our REIT taxable income, determined without regard to the dividends paid deduction and including any net capital gains, we will be subject to U.S. federal corporate income tax on our undistributed net taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we distribute to our stockholders in a calendar year is less than a minimum amount specified for REITs under U.S. federal income tax laws. The same rules apply to our REIT subsidiary. We currently intend to make distributions to our stockholders, and to cause our REIT subsidiary to make distributions, to comply with the REIT requirements of the Code.
Our FFO is currently generated largely by rents paid under the Windstream Leases. From time to time, we may generate taxable income greater than our cash flow as a result of differences in timing between the recognition of taxable income and the actual receipt of cash or the effect of nondeductible capital expenditures, the creation of reserves or required debt or amortization payments. If we do not have other funds available in these situations, we could be required to borrow funds on unfavorable terms, sell assets at disadvantageous prices or distribute amounts that would otherwise be invested in future acquisitions in order to make distributions sufficient to enable us to pay out enough of our taxable income to satisfy the REIT distribution requirement and to avoid corporate income tax and the 4% excise tax in a particular year. These alternatives could increase our costs or reduce our equity. Thus, compliance with the REIT requirements may hinder our ability to grow, which could adversely affect the value of our common stock and decrease cash available to service debt.
A deterioration in Windstream’s financial condition could adversely affect our ability to continue to qualify as a REIT.
In addition to satisfying the distribution requirement described above in the immediately preceding risk factor, we and our subsidiary REIT must each satisfy a number of other requirements in order to qualify as a REIT. A deterioration in Windstream’s financial condition could adversely affect our ability to satisfy several of these requirements and thus our ability to continue to qualify as a REIT.
For example, in order to qualify as a REIT for any year, at the end of each calendar quarter, at least 75% of the value of our assets must consist of cash, cash items, government securities and “real estate assets” (as defined in the Code), and no more than 20% of the value of our total assets can be represented by securities (other than qualified real estate assets) of one or more TRSs. If we fail to comply with either of these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification. These same rules apply to our REIT
subsidiary. Our ability to satisfy these requirements depends in substantial part on the value of the assets that are the subject of the Windstream Leases with Windstream, and any diminution in the value of such assets, including as a result of any diminution in the implied value of the Windstream Leases as a result of changes in the financial condition or creditworthiness of Windstream or Windstream’s inability or unwillingness to meet its rent and other obligations under the Windstream Leases, could adversely affect our ability to satisfy these requirements at the end of any calendar quarter, and there can be no assurance that we would be able to timely correct any such failure or otherwise qualify for any statutory relief provision. See “-Risks Related to Our Business-We are dependent on Windstream Holdings to make payments to us under the Windstream Leases, and an event that materially and adversely affects Windstream’s business, financial position or results of operations could materially and adversely affect our business, financial position or results of operations.” In addition, under applicable provisions of the Code, we will not be treated as a REIT for any year unless we satisfy various requirements, including requirements relating to the sources of our gross income in such year. These same rules apply to our REIT subsidiary. Our ability to satisfy these gross income tests depends in substantial part on our receipt of rents paid under the Windstream Leases. Windstream’s inability or unwillingness to meet its rent and other obligations under the Windstream Leases, or any suspension, delay or other reduction in the amount of rent that we receive under the Windstream Leases could adversely affect our ability to qualify as a REIT.
Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow.
Even if we remain qualified for taxation as a REIT, we may be subject to certain U.S. federal, state and local taxes on our income and assets, including taxes on any undistributed income and state or local income, property and transfer taxes. For example, we hold some of our assets and conduct certain of our activities through a TRS that is subject to U.S. federal, state and local corporate-level income taxes as a regular C corporation. In addition, we may incur a 100% excise tax on transactions with a TRS if they are not conducted on an arm’s-length basis. Any of these taxes could decrease cash available for distribution to our stockholders and servicing our debt.
Complying with the REIT requirements may cause us to forego otherwise attractive acquisition opportunities.
To qualify as a REIT for U.S. federal income tax purposes, we must ensure that, at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and “real estate assets” (as defined in the Code). The remainder of our investments (other than government securities, qualified real estate assets and securities issued by a TRS) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our total assets (other than government securities, qualified real estate assets and securities issued by a TRS) can consist of the securities of any one issuer, no more than 20% of the value of our total assets can be represented by securities (other than qualified real estate assets) of one or more TRSs, and no more than 25% of the value of our total assets can be represented by nonqualified publicly offered REIT debt instruments (as defined in the Code). If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result of such asset limitations, we may be required to forego otherwise attractive investments. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders and servicing our debt.
Risks Related to Our Common Stock
We cannot guarantee our ability to pay dividends in the future, and we could elect to pay dividends substantially in the form of additional shares of our common stock.
To qualify as a REIT, our annual dividend must not be less than 90% of our REIT taxable income on an annual basis, determined without regard to the dividends paid deduction and excluding any net capital gains. Our ability to pay dividends may be adversely affected by a number of factors, including the risk factors herein. Dividends will be authorized by our board of directors and declared by us based upon a number of factors, including actual results of operations, restrictions under Maryland law or applicable debt covenants, our financial condition, our taxable income, the annual distribution requirements under the REIT provisions of the Code, our operating expenses and other factors our directors deem relevant. We cannot ensure that we will achieve investment results that will allow us to make a specified level of cash dividends or year-to-year increases in cash dividends in the future. Accordingly,
because we are required to make distributions in certain amounts to our shareholders in order to maintain our REIT status and avoid incurring entity-level income and excise tax, we may elect to pay one or more dividends to our shareholders substantially in the form of additional shares of common stock. If we do so, the common stock that we distribute would be taxable dividend income to our shareholders, in whole or in part, based on the fair market value of our common stock at the time the dividend is paid.
Furthermore, while we are required to pay dividends in order to maintain our REIT status (as described above under “Risks Related to the Status of Uniti as a REIT-REIT distribution requirements could adversely affect our ability to execute our business plan”), we may elect not to maintain our REIT status, in which case we would no longer be required to pay such dividends. Moreover, even if we do maintain our REIT status, after completing various procedural steps, we may elect to comply with the applicable distribution requirements by distributing, under certain circumstances, shares of our common stock in lieu of cash, which may result in holders of our common stock incurring tax liability without the receipt of a corresponding amount of cash. If we elect not to maintain our REIT status or to satisfy any required distributions in shares of common stock in lieu of cash, such action could negatively affect our business and financial condition as well as the market price of our common stock. No assurance can be given that we will pay any dividends on shares of our common stock in the future.
The market price and trading volume of our common stock may fluctuate widely.
We cannot predict the prices at which our common stock may trade. The market price of our common stock has fluctuated significantly since February 15, 2019 and may continue to fluctuate significantly, depending upon many factors, some of which may be beyond our control. In addition, under the settlement with Windstream, we issued 38,633,470 shares, equal to 19.99% of our currently outstanding common stock, to certain investors at a purchase price of $6.33 per share. These investors will be able to resell their shares into the market over time, which could lead to volatility and lower declines in the price of our common stock.
Our charter restricts the ownership and transfer of our outstanding stock, which may have the effect of delaying, deferring or preventing a transaction or change of control of our company.
In order for us to qualify as a REIT, not more than 50% in value of our outstanding shares of stock may be owned, beneficially or constructively, by five or fewer individuals at any time during the last half of each taxable year after the first year for which we elect to be taxed and qualify as a REIT. Additionally, at least 100 persons must beneficially own our stock during at least 335 days of a taxable year (other than the first taxable year for which we elect to be taxed and qualify as a REIT). Our charter, with certain exceptions, authorizes our board of directors to take such actions as are necessary or advisable to preserve our qualification as a REIT. Our charter also provides that, unless exempted by the board of directors, no person may own more than 9.8% in value or in number, whichever is more restrictive, of the outstanding shares of our common stock or more than 9.8% in value of the aggregate of the outstanding shares of all classes and series of our stock. The constructive ownership rules are complex and may cause shares of stock owned directly or constructively by a group of related individuals or entities to be constructively owned by one individual or entity. These ownership limits could delay or prevent a transaction or a change in control of us that might involve a premium price for shares of our stock or otherwise be in the best interests of our stockholders.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments.
None

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ITEM 2. PROPERTIES
Item 2. Properties.
Uniti and its subsidiaries own or lease approximately 128,000 fiber network route miles, representing approximately 7.6 million fiber strand miles, approximately 230,000 route miles of copper cable lines, wireless communication towers, central office land and buildings across 44 states and beneficial rights to permits, pole agreements and easements.
Leasing Segment
Uniti Leasing’s network properties include its fiber route miles and copper route miles. Below is a geographic distribution summary as of December 31, 2021:
Location
Fiber Route Miles
Copper Route Miles
Total Route Miles
TX
12,700
39,000
51,700
GA
11,800
44,900
56,700
KY
9,900
32,200
42,100
IA
8,900
31,500
40,400
NC
5,400
18,000
23,400
OH
5,300
10,400
15,700
AR
4,100
13,500
17,600
IL
3,500
-
3,500
FL
3,000
8,400
11,400
OK
2,400
12,000
14,400
IN
2,300
-
2,300
MI
2,000
-
2,000
WI
2,000
-
2,000
CA
1,800
-
1,800
MO
1,600
10,800
12,400
NM
1,600
5,100
6,700
NY
1,400
-
1,400
PA
1,300
-
1,300
TN
1,300
-
1,300
AL
1,200
2,400
3,600
VA
1,100
-
1,100
LA
1,000
-
1,000
Other(1)
6,700
1,500
8,200
Total
92,300
229,700
322,000
(1) Includes 20 states.
Fiber Segment
Uniti Fiber’s network properties include its fiber route miles and wireless communications towers. Below is a geographic distribution summary as of December 31, 2021:
Location
Fiber Route Miles
FL
8,400
LA
6,300
GA
6,000
AL
4,900
MS
3,100
VA
1,600
NY
1,500
TX
1,400
Other(1)
2,100
Total
35,300
(1) Includes 13 states.
Location
Towers
LA
NM
AR
TX
NE
Other(1)
Total
(1) Includes 10 states.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings.
A description of legal proceedings can be found in Note 16 - Commitments and Contingencies to our consolidated financial statements in Part II, Item 8 “Financial Statements and Supplementary Data,” and is incorporated by reference into this Item 3.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures.
None
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock is traded on the NASDAQ Global Select Market under the symbol “UNIT.”
Holders
As of February 18, 2022, the closing price of our common stock was $11.31 per share as reported on the NASDAQ Global Select Market. As of February 18, 2022, we had 236,325,229 outstanding shares of common stock, and there were approximately 17,688 registered holders of record of Uniti’s common stock. A substantially greater number of holders of Uniti common stock are “street name” or beneficial holders, whose shares of record are held by banks, brokers, and other financial institutions.
Dividends (Distributions)
Distributions with respect to our common stock are characterized for federal income tax purposes as taxable ordinary dividends, capital gains dividends, non-dividend distributions or a combination thereof. It has been our policy to declare dividends to common shareholders so as to comply with the provisions of the Internal Revenue Code governing REITs.
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 addition, our 7.875% senior secured notes due 2025 presently limit our ability to make cash distributions to our shareholders in amounts exceeding 90% of our good faith estimate, as of the date on which the first quarterly dividend for the relevant year is declared, of our REIT taxable income for such year, determined without regard to the dividends paid deduction and excluding any capital gains, until we reduce our net leverage ratio.
As a result, we may be required to record a provision in our Consolidated Financial Statements for U.S. federal income taxes related to the activities of the REIT and its passthrough subsidiaries for any undistributed income. We are subject to the statutory requirements of the locations in which we conduct business, and state and local income taxes are accrued as deemed required in the best judgment of management based on analysis and interpretation of respective tax laws.
Stock Performance
The following graph shows a comparison from December 31, 2016 through December 31, 2021 on the NASDAQ Global Select Market of the cumulative total return for our common stock, the Standard & Poor's 400 Stock Index (S&P 400 Index), and the MSCI US REIT Index. The graph assumes that $100 was invested at the market open on December 31, 2016 and that all dividends were reinvested in the common stock of Uniti, the S&P 400 Index and the MSCI US REIT Index. The stock price performance of the following graph is not necessarily indicative of future stock price performance.
Cumulative Total Stockholder Returns
Based on Investment of $100.00 Beginning on December 31, 2016
12/31/2016
12/31/2017
12/31/2018
12/31/2019
12/31/2020
12/31/2021
Uniti Group Inc.
$
100.00
$
78.90
$
78.89
$
43.43
$
66.61
$
83.70
S&P 400 Index
100.00
116.24
103.36
130.44
148.26
184.97
MSCI US REIT Index
100.00
105.13
100.39
126.38
116.81
167.11
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 5.
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
October 1, 2021 to October 31, 2021
6,314
$
12.11
-
-
November 1, 2021 to November 30, 2021
-
-
-
-
December 1, 2021 to December 31, 2021
16,128
13.19
-
-
Total
22,442
$
12.88
-
-
(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.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. Selected Financial Data.
On November 19, 2020, the SEC adopted certain amendments to Regulation S-K, including the elimination of Item 301 thereof. The final rules became effective on February 10, 2021. The Company has chosen to adopt the recent amendments and omit the disclosure formerly required by Item 301 of Regulation S-K.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. 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, as well as our critical accounting estimates.
This section generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this Annual Report on Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the Securities and Exchange Commission on March 5, 2021, as amended by Amendment No. 1 thereto filed on Form 10-K/A with the SEC on March 30, 2021.
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 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 December 31, 2021, we are the sole general partner of the Operating Partnership and own approximately 99.7% of the partnership interests in the Operating Partnership. In addition, we have undertaken series of transactions to permit us to hold certain assets indirectly 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.
We have historically managed our operations as the four reportable business segments listed below (in addition to our corporate operations), but due to the sale of our towers business and wind down of the Consumer CLEC Business, effective January 1, 2021, we manage our operations focused on our two primary businesses, Leasing and Fiber Infrastructure:
Leasing Segment: Represents the results from 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. 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.
Towers Segment: Represents the operations of our former towers business, Uniti Towers, through which we acquired and constructed tower and tower-related real estate and leased space on communications towers to wireless service providers and other tenants in the United States. The Company completed a series of transactions to largely divest of its towers business: on April 2, 2019, May 23, 2019 and June 1, 2020, the Company completed the sales of its Latin American business, substantially all of its U.S. ground lease business, and its U.S. tower business, respectively. Portions of our former towers business were a component of our REIT operations, while the remainder were owned and operated by our TRSs.
Consumer CLEC Segment: Represents the operations of Talk America through which we operated the Consumer CLEC Business that, prior to the Spin-Off, was reported as an integrated operation within Windstream. Talk America provided local telephone, high-speed internet and long-distance services to customers in the eastern and central United States. As of the end of the second quarter of 2020, we substantially completed a wind down of our Consumer CLEC business.
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 15 to our consolidated financial statements contained in Part II, Item 8 “Financial Statements and Supplementary Data.”
Significant Business Developments
Unsecured Notes Offering and Redemption. On October 13, 2021, the Operating Partnership, Uniti Fiber Holdings Inc., Uniti Group Finance 2019 Inc. and CSL Capital, LLC issued $700 million aggregate principal amount of 6.00% Senior Unsecured Notes due 2030 (the “2030 Notes”) and used the proceeds to fund the redemption in full of all outstanding 7.125% Senior Unsecured Notes due 2024 (the “2024 Notes”). The Company used the remaining proceeds of $78.0 million, together with cash on hand, to prepay a portion of the settlement obligations under the settlement agreement with Windstream. See Note 16 to our consolidated financial statements contained in Part II, Item 8 “Financial Statements and Supplementary Data.”
Everstream Solutions LLC OpCo-PropCo Transaction. On May 28, 2021, the Company completed its previously announced strategic transaction with Everstream Solutions LLC (“Everstream”). As part of the transaction, Uniti entered into two 20-year IRU lease agreements with Everstream on Uniti owned fiber. Concurrently, Uniti sold its Uniti Fiber Northeast operations and certain dark fiber IRU contracts acquired as part of the Windstream settlement to Everstream. Total cash consideration, including upfront IRU payments, was approximately $135 million. In addition to the upfront proceeds, Uniti will receive fees of approximately $3 million annually from Everstream over the initial 20-year term of the IRU lease agreements, subject to an annual escalator of 2%. We recorded a gain of $28.1 million related to this transaction, which is included in gain on sale of operations in our Consolidated Statements of Income (Loss).
Secured Notes Offering and Redemption. On April 20, 2021, the Operating Partnership, Uniti Group Finance 2019 Inc. and CSL Capital, LLC issued $570 million aggregate principal amount of 4.750% Senior Secured Notes due 2028 (the “2028 Secured Notes”) and used the proceeds to fund the redemption in full of all outstanding 6.00% Senior Secured Notes due 2023 (the “2023 Secured Notes”).
Unsecured Notes Offering, Tender and Redemption. On February 2, 2021, the Operating Partnership, Uniti Group Finance 2019 Inc. and CSL Capital, LLC issued $1.11 billion aggregate principal amount of 6.50% Senior Unsecured Notes due 2029 (the “2029 Notes”) and used the net proceeds from the offering to fund the tender offer and subsequent redemption of all 8.25% Senior Unsecured Notes due 2023 (the “2023 Notes”).
Comparison of the years ended December 31, 2021 and 2020
The following tables sets forth, for the periods indicated, our results of operations expressed as dollars and as a percentage of total revenues:
(Thousands)
Year Ended
December 31, 2021
% of
Revenues
Year Ended
December 31, 2020
% of
Revenues
Revenues:
Leasing
$
801,497
72.8%
$
745,915
69.9%
Fiber Infrastructure
299,025
27.2%
314,363
29.5%
Tower
-
0.0%
6,112
0.5%
Consumer CLEC
-
0.0%
0.1%
Total revenues
1,100,522
100.0%
1,067,041
100.0%
Costs and Expenses:
Interest expense, net
446,296
40.6%
497,128
46.6%
Depreciation and amortization
290,942
26.4%
329,403
30.9%
General and administrative expense
101,176
9.2%
104,975
9.8%
Operating expense (exclusive of depreciation and amortization)
146,869
13.3%
159,337
14.9%
Settlement expense
-
0.0%
650,000
60.9%
Goodwill impairment
-
0.0%
71,000
6.7%
Transaction related and other costs
7,544
0.7%
63,875
6.0%
Gain on sale of real estate
(442
)
(0.0%)
(86,267
)
(8.1%)
Gain on sale of operations
(28,143
)
(2.6%)
-
0.0%
Other expense, net
18,553
1.7%
11,703
1.1%
Total costs and expenses
982,795
89.3%
1,801,154
168.8%
Income (loss) before income taxes and equity in earnings from unconsolidated entities
117,727
10.7%
(734,113
)
(68.8%)
Income tax benefit
(4,916
)
(0.4%)
(15,203
)
(1.4%)
Equity in earnings from unconsolidated entities
(2,102
)
(0.2%)
(98
)
(0.0%)
Net income (loss)
124,745
11.3%
(718,812
)
(67.4%)
Net income (loss) attributable to noncontrolling interests
1,085
0.1%
(12,511
)
(1.2%)
Net income (loss) attributable to shareholders
123,660
11.2%
(706,301
)
(66.2%)
Participating securities' share in earnings
(1,077
)
(0.1%)
(1,078
)
(0.1%)
Dividends declared on convertible preferred stock
(10
)
(0.0%)
(9
)
(0.0%)
Net income (loss) attributable to common shareholders
$
122,573
11.1%
$
(707,388
)
(66.3%)
The following table sets forth, for the years ended December 31, 2021 and 2020, revenues and Adjusted EBITDA of our reportable segments:
Year Ended December 31, 2021
(Thousands)
Leasing
Fiber Infrastructure
Towers
Consumer CLEC
Corporate
Total of Reportable Segments
Revenues
$
801,497
$
299,025
$
-
$
-
$
-
$
1,100,522
Adjusted EBITDA
$
784,061
$
118,452
$
-
$
-
$
(24,232
)
$
878,281
Less:
Interest expense, net
446,296
Depreciation and amortization
174,622
116,065
-
-
290,942
Other, net
24,917
Transaction related and other costs
7,544
Gain on sale of operations
(28,143
)
Gain on sale of real estate
(442
)
Stock-based compensation
13,847
Income tax benefit
(4,916
)
Adjustments for equity in earnings from unconsolidated entities
3,491
Net income
$
124,745
Year Ended December 31, 2020
(Thousands)
Leasing
Fiber Infrastructure
Towers
Consumer CLEC
Corporate
Total of Reportable Segments
Revenues
$
745,915
$
314,363
$
6,112
$
$
-
$
1,067,041
Adjusted EBITDA
$
737,337
$
112,289
$
$
(545
)
$
(30,323
)
$
818,835
Less:
Interest expense, net
497,128
Depreciation and amortization
201,321
126,211
329,403
Other, net
11,703
Settlement expense
650,000
Goodwill impairment
71,000
Transaction related and other costs
63,875
Gain on sale of real estate
(86,267
)
Stock-based compensation
13,721
Income tax benefit
(15,203
)
Adjustments for equity in earnings from unconsolidated entities
2,287
Net loss
$
(718,812
)
Operating Metrics
As of December 31,
% Increase / (Decrease)
Operating metrics:
Leasing:
Fiber strand miles
4,900,000
4,510,000
8.6%
Copper strand miles
230,000
230,000
0.0%
Fiber Infrastructure:
Fiber strand miles
2,680,000
2,380,000
12.6%
Customer connections
26,300
26,300
0.0%
Revenues
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. The aggregate initial annual rent under the Windstream Leases is $663.0 million, equal to the annual rent under the Master Lease previously in effect, and is subject to annual escalation at a rate of 0.5%. For a description of the Windstream leases, see Part II, Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations in “Liquidity and Capital Resources-Windstream Master Lease and Windstream Leases.”
The rent for the first year of each renewal term under the Windstream Leases will be an amount agreed to by us and Windstream. While the agreements require 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”). Uniti’s total annual reimbursement commitments to Windstream for the Growth Capital Improvements is discussed below in this Part II, Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 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.
During the year ended December 31, 2021, Uniti reimbursed $221.5 million of Growth Capital Improvements. Subsequent to December 31, 2021, Windstream requested and we reimbursed $13.4 million of qualifying Growth Capital Improvements. As of the date of this Annual Report on Form 10-K, we have reimbursed a total of $319.6 million of Growth Capital Improvements.
Year Ended December 31,
(Thousands)
Amount
% of Segment Revenues
Amount
% of Segment Revenues
Leasing revenues:
Windstream Leases:
Cash revenue
Cash rent
$
665.6
83.0%
$
662.3
88.8%
GCI revenue
1.2
0.1%
-
0.0%
Total cash revenue
666.8
83.1%
662.3
88.8%
Non-cash revenue
TCI revenue
39.0
4.9%
35.1
4.7%
GCI revenue
11.4
1.4%
0.9
0.1%
Other straight-line revenue
13.3
1.7%
4.3
0.6%
Total non-cash revenue
63.7
8.0%
40.3
5.4%
Total Windstream Leases revenue
730.5
91.1%
702.6
94.2%
Other triple-net leasing and dark fiber IRU
71.0
8.9%
43.3
5.8%
Total Leasing revenues
$
801.5
100.0%
$
745.9
100.0%
The increase in TCI revenue is attributable to continued investment by Windstream, where Windstream invested $139.0 million of TCIs during the year ended December 31, 2021, offset by the Growth Capital Improvement reimbursement of capital improvements completed in 2020, as allowed under the Settlement, that were previously classified as TCIs of $28.5 million. The total amount invested in TCIs by Windstream since the inception of the Master Lease was $984.7 million as of December 31, 2021. As of December 31, 2020, Windstream had invested a total of $874.2 million in such improvements. For the year ended December 31, 2021, we recognized $71.0 million of leasing revenues from non-Windstream Leases triple-net leasing and dark fiber indefeasible rights of use (“IRU”) arrangements, compared to $43.3 million for the year ended December 31, 2020, the increase is primarily driven by the revenues associated with the Asset Purchase Agreement and the IRU arrangements entered into with Everstream as defined in Note 6 to our consolidated financial statements contained in Part II, Item 8 Financial Statements and Supplementary Data.
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 on September 21, 2020, Windstream was a publicly traded company 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 ended June 30, 2020 can be found at www.sec.gov. On September 22, 2020, Windstream filed a Form 15 to terminate all filing obligations under Sections 12(g) and 15(d) under the Exchange Act. Windstream’s filings are not incorporated by reference in this Annual Report on Form 10-K.
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 new 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.
We note that in August 2020, Moody’s Investor Service assigned a B3 corporate family rating with a stable outlook to Windstream in connection with its post-emergence exit financing. At the same time, S&P Global Ratings assigned Windstream a B- issuer rating with a stable outlook. These ratings were both upgrades from Windstream’s pre-bankruptcy ratings. 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.
Under the terms of the Windstream Leases, Windstream is required to provide us audited financial statements as of and for the year ended December 31, 2021 (the “2021 Financial Statements”) no later than 90-days after its fiscal year-end. After receipt of the 2021 Financial Statements, Uniti expects to file a Form 10-K/A to include the 2021 Financial Statements in our annual report. As of the date of this Annual Report on Form 10-K, Windstream is current on all lease payments required under the Windstream Leases.
Fiber Infrastructure - For the years ended December 31, 2021 and 2020, we recognized $299.0 million and $314.4 million of revenue, respectively, in our Fiber Infrastructure segment. The decrease is primarily attributable to a $11.1 million decrease related to the wind down of our construction activities reported within E-Rate and government revenues, a $10.1 million decrease in lit backhaul service revenues related to the Uniti Fiber Northeast operations sold on May 28, 2021 and a decrease of $5.5 million lit backhaul service revenues related to lit-to-dark fiber conversion and renewals at a lower rate and longer term, partially offset by increased internet and installation services and equipment sales of $8.7 million reported within enterprise and wholesale and $3.3 million in increased dark fiber and small cell revenues. Revenue components for the Fiber Infrastructure segment for the years ended December 31, 2021 and 2020 consisted of the following:
Year Ended December 31,
(Thousands)
Amount
% of
Segment Revenues
Amount
% of
Segment Revenues
Fiber Infrastructure revenues:
Lit backhaul services
$
86,915
29.0%
$
106,125
33.8%
Enterprise and wholesale
86,390
28.9%
78,702
25.0%
E-Rate and government
74,396
24.9%
80,428
25.6%
Dark fiber and small cells
48,052
16.1%
44,767
14.2%
Other services
3,272
1.1%
4,341
1.4%
Total Fiber Infrastructure revenues
$
299,025
100.0%
$
314,363
100.0%
Towers - For the year ended December 31, 2021, we recognized no revenue from the Towers business, as we completed the sale of our U.S. tower business on June 1, 2020.
Consumer CLEC - For the year ended December 31, 2021, we recognized no revenue from the Consumer CLEC business, as we substantially completed the wind down of business as of the end of the second quarter of 2020.
Interest Expense, net
Year Ended December 31,
(Thousands)
Increase / (Decrease)
Interest expense, net:
Cash:
Senior secured term loan B - variable rate
$
-
$
15,709
$
(15,709
)
Senior secured notes - 4.75%, 6.00% and 7.875%
207,615
190,992
16,623
Senior unsecured notes - 4.00%, 6.00%. 6.50%, 7.125%, and 8.25%
138,931
148,125
(9,194
)
Senior secured revolving credit facility - variable rate
9,467
14,691
(5,224
)
Tender premium and early redemption payments
24,694
-
24,694
Interest rate swap termination
11,317
10,155
1,162
Other
2,437
3,986
(1,549
)
Total cash interest
394,461
383,658
10,803
Non-cash:
Amortization of deferred financing costs and debt discount
18,122
36,955
(18,833
)
Write off of deferred financing costs and debt discount
24,587
73,952
(49,365
)
Accretion of settlement payable
16,901
4,768
12,133
Gain on prepayment of settlement payable
(5,432
)
-
(5,432
)
Capitalized Interest
(2,343
)
(2,205
)
(138
)
Total non-cash interest
51,835
113,470
(61,635
)
Total interest expense, net
$
446,296
$
497,128
$
(50,832
)
Interest expense for the year ended December 31, 2021 decreased $50.8 million compared to the year ended December 31, 2020. The decrease is primarily due to the decrease in debt extinguishment loss of $24.7 million on the 2023 Secured Notes, the 2023 Notes and the 2024 Notes and lower cash interest expense of $19.4 million resulting from extinguishment of 2023 Secured Notes and 2023 Notes, lower cash interest expense of $5.2 million related to the revolving credit facility and partially offset by higher cash interest expense of $7.2 million related to the extinguishment of the 2024 Notes during the year ended December 31, 2021.
Depreciation and Amortization Expense
We incur depreciation and amortization expense related to our property, plant and equipment, corporate assets and intangible assets. Depreciation and amortization expense for our reportable segments for the years ended December 31, 2021 and 2020 consisted of the following:
Year Ended December 31,
(Thousands)
Increase / (Decrease)
Depreciation and amortization expense by segment:
Depreciation expense
Leasing
$
167,705
$
198,805
$
(31,100
)
Fiber Infrastructure
93,193
101,332
(8,139
)
Corporate
(42
)
Towers
-
(783
)
Consumer CLEC
-
-
-
Total depreciation expense
261,153
301,217
(40,064
)
Amortization expense
Leasing
6,917
2,516
4,401
Fiber Infrastructure
22,872
24,879
(2,007
)
Corporate
-
-
-
Towers
-
-
-
Consumer CLEC
-
(791
)
Total amortization expense
29,789
28,186
1,603
Total depreciation and amortization expense
$
290,942
$
329,403
$
(38,461
)
Leasing - Leasing depreciation expense decreased $31.1 million for the year ended December 31, 2021 as compared to the year ended December 31, 2020. The decrease is primarily attributable to the natural decrease in remaining useful life of the Windstream Distribution System assets which utilize the group composite depreciation method. Amortization expense increased $4.4 million for the year ended December 31, 2021 as compared to the year ended December 31, 2020.
Fiber Infrastructure - Fiber Infrastructure depreciation and amortization expense decreased $8.1 million for the year ended December 31, 2021 as compared to the year ended December 31, 2020. The decrease in depreciation expense is primarily attributable to the Everstream transaction completed on May 28, 2021. The $2.0 million decrease in amortization expense relates to a trademark intangible asset, associated with the wind down of the construction business, that became fully amortized in 2020.
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 the administrative activities of our segments.
Year Ended December 31,
(Thousands)
Amount
% of Consolidated Revenues
Amount
% of Consolidated Revenues
General and administrative expense by segment:
Leasing
$
10,127
0.9%
$
7,022
0.7%
Fiber Infrastructure
55,074
5.0%
54,529
5.1%
Corporate
35,975
3.3%
40,587
3.8%
Towers
-
0.0%
2,607
0.2%
Consumer CLEC
-
0.0%
0.0%
Total general and administrative expenses
$
101,176
9.2%
$
104,975
9.8%
Leasing - Leasing general and administrative expense increased $3.1 million for the year ended December 31, 2021 as compared to the year ended December 31, 2020. The increase is primarily attributable to increased personnel expenses of $1.9 million.
Fiber Infrastructure - Fiber Infrastructure general and administrative expense increased $0.5 million for the year ended December 31, 2021 as compared to the year ended December 31, 2020.
Towers- For the year ended December 31, 2021, Towers general and administrative expenses were not incurred as the U.S. tower business sale was completed on June 1, 2020. Towers general and administrative expense was $2.6 million for the year ended December 31, 2020.
Corporate - Corporate general and administrative expense decreased $4.6 million for the year ended December 31, 2021 as compared to the year ended December 31, 2020. The decrease is primarily attributable to decreased professional and legal expenses of $2.6 million and decreased insurance expense of $1.1 million.
Operating Expense
Operating expense for the year ended December 31, 2021, totaled $146.9 million compared to $159.3 million for the year ended December 31, 2020. This decrease was primarily attributable to decreases in Fiber Infrastructure, Towers and Consumer CLEC Business operating expenses offset by an increase in Leasing operating expenses discussed below. Operating expense for our reportable segments for the years ended December 31, 2021 and 2020 consisted of the following:
Year Ended December 31,
(Thousands)
Amount
% of
Consolidated Revenues
Amount
% of
Consolidated Revenues
Operating expense by segment:
Leasing
$
16,556
1.5%
$
4,438
0.4%
Fiber Infrastructure
130,313
11.8%
150,241
14.1%
Towers
-
0.0%
3,692
0.3%
CLEC
-
0.0%
0.1%
Total operating expenses
$
146,869
13.3%
$
159,337
14.9%
Leasing - Leasing operating expense was $16.6 million and $4.4 million for the years ended December 31, 2021 and 2020, respectively. The increase is primarily driven by a $10.2 million increase in network expenses due to the Asset Purchase Agreement the Company entered into with Windstream which was completed in the third quarter of 2020.
Fiber Infrastructure - For the year ended December 31, 2021, Fiber Infrastructure operating expenses totaled $130.3 million as compared to $150.2 million for the year ended December 31, 2020. The $19.9 million decrease in operating expenses is primarily attributable to a $13.3 million decrease related to the wind down of our construction activities and a $5.9 million decrease related to the Uniti Fiber Northeast operations sold on May 28, 2021. Other decrease of $0.7 million in operating expenses were driven by reduced network restoration and off-net expenses.
Towers - For the year ended December 31, 2021, Towers operating expenses were not incurred as the U.S. tower business sale was completed on June 1, 2020. Towers operating expense was $3.7 million for the year ended December 31, 2020.
Consumer CLEC - For the year ended December 31, 2021, Consumer CLEC Business operating expenses were not incurred, as we substantially completed the wind down of the business as of the end of the second quarter of 2020. CLEC operating expense was $0.9 million for the year ended December 31, 2020.
Settlement Expense
As described in Note 16 to our consolidated financial statements contained in Part II, Item 8 “Financial Statements and Supplementary Data,” on July 25, 2019, in connection with Windstream’s bankruptcy, Windstream Holdings and Windstream Services filed a complaint with the U.S. Bankruptcy Court for the Southern District of New York in an adversary proceeding against Uniti and certain of its affiliates. On March 2, 2020, Uniti and Windstream jointly announced that they agreed to the Settlement, as defined in Note 16 to our consolidated financial statements in Part II, Item 8 “Financial Statements and Supplementary Data,”) to resolve any and all claims and causes of action that have been or may be asserted against Uniti by Windstream, including all litigation brought by Windstream and certain of its creditors in the context of Windstream’s bankruptcy, and on May 12, 2020, the Bankruptcy Court entered an order approving Windstream’s assumption of the Master Lease as part of the Settlement. As a result, during the second quarter of 2020, we estimated that $650.0 million of the consideration paid to Windstream should be classified as settlement of litigation, and therefore, recorded a $650.0 million charge. The charge represented our estimated fair value of the litigation settlement component of the Settlement.
Goodwill Impairment
We performed our annual goodwill impairment analysis during the fourth quarter of 2021. We concluded that the fair value of the Fiber Infrastructure reporting unit, estimated using a combination of the income approach and market approach, approximates its carrying amount. Accordingly, we recorded no goodwill impairment in the Fiber Infrastructure reporting unit for the year ended December 31, 2021.
We performed our annual goodwill impairment analysis during the fourth quarter of 2020. As a result of increased capital expenditure investments in dark fiber and small cell projects and less than anticipated cash flow growth, we concluded that the fair value of the Fiber Infrastructure reporting unit, estimated using a combination of the income approach and market approach, was less that its carrying amount. Accordingly, we recorded a $71.0 million goodwill impairment in the Fiber Infrastructure reporting unit during the year ended December 31, 2020.
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 enterprise resource planning system. For the year ended December 31, 2021, we incurred $7.5 million of transaction related and other costs, compared to $63.9 million of such costs during the year ended December 31, 2020. The decrease is primarily related to incurring $1.3 million of total costs related to the Windstream bankruptcy for the year ended December 31, 2021, as compared to $43.4 million for year ended December 31, 2020, and we incurred $5.2 million in costs related to the sale of our U.S. towers business during the year ended December 31, 2020.
Gain on Sale of Real Estate
For the year ended December 31, 2020, we recognized gains of $63.4 million and $23.0 million related to the sale of Uniti Towers’ U.S tower portfolio and the Company’s Midwest fiber network assets, respectively.
Gain on Sale of Operations
For the year ended December 31, 2021, we recognized a gain of $28.1 million related to the May 28, 2021 completion of the Everstream OpCo-PropCo Transaction. See Note 6.
Other Expense (Income), net
We recognized $18.6 million of other expense for the year ended December 31, 2021, which included $17.6 million of expenses related to the issuance of the 2028 Secured Notes and 2030 Notes. Other expense for the year ended December 31, 2020, totaled $11.7 million, which included a $7.2 million unrealized loss for mark-to-market adjustments on our contingent consideration arrangements.
Income Tax (Benefit) Expense
The recorded income tax (benefit) expense recorded for the years ended December 31, 2021 and 2020, respectively, is related to the tax impact of the following:
Year Ended December 31,
(Thousands)
Income tax benefit
Pre-tax loss (Fiber Infrastructure)
$
(6,657
)
$
(12,758
)
Return to accrual adjustments
-
(2,839
)
Other
1,741
Total income tax benefit
$
(4,916
)
$
(15,203
)
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 the 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.
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 attributable to common shareholders to FFO and AFFO for the years ended December 31, 2021 and 2020 is as follows:
Year Ended December 31,
(Thousands)
Net income (loss)
$
124,745
$
(718,812
)
Depreciation and amortization
290,942
329,403
Interest expense, net
446,296
497,128
Income tax benefit
(4,916
)
(15,203
)
EBITDA
$
857,067
$
92,516
Stock-based compensation
13,847
13,721
Transaction related and other costs
7,544
63,875
Settlement expense
-
650,000
Goodwill impairment
-
71,000
Gain on sale of operations
(28,143
)
-
Gain on sale of real estate
(442
)
(86,267
)
Other, net
24,917
11,703
Adjustments for equity in earnings from unconsolidated entities
3,491
2,287
Adjusted EBITDA
$
878,281
$
818,835
Year Ended December 31,
(Thousands)
Net income (loss) attributable to common shareholders
$
122,573
$
(707,388
)
Real estate depreciation and amortization
211,472
246,713
Gain on sale of real estate, net of tax
(442
)
(85,860
)
Participating securities' share in earnings
1,077
1,078
Participating securities' share in FFO
(2,188
)
(1,162
)
Real estate depreciation and amortization from unconsolidated entities
2,465
1,048
Adjustments for noncontrolling interests
(2,154
)
(2,622
)
FFO attributable to common shareholders
$
332,803
$
(548,193
)
Transaction related and other costs
7,544
63,875
Change in fair value of contingent consideration
7,163
Amortization of deferred financing costs and debt discount
18,122
36,955
Write off deferred financing costs and debt discount
24,587
73,952
Costs related to the early repayment of debt
49,414
-
Stock-based compensation
13,847
13,721
Gain on sale of operations
(28,143
)
-
Non-real estate depreciation and amortization
79,470
82,690
Settlement expense
-
650,000
Goodwill impairment
-
71,000
Straight-line revenue
(41,239
)
(6,872
)
Maintenance capital expenditures
(8,342
)
(7,149
)
Other, net
(17,694
)
(32,374
)
Adjustments for equity earnings from unconsolidated entities
1,026
1,238
Adjustments for noncontrolling interests
(1,090
)
(16,496
)
AFFO attributable to common shareholders
$
430,326
$
389,510
Critical Accounting Policies and Estimates
We make certain judgments and use certain estimates and assumptions when applying accounting principles in the preparation of our 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 following 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 statements are appropriate. However, if actual experience differs from the assumptions and other considerations used in estimating amounts reflected in our financial statements, the resulting changes could have a material adverse effect on our results of operations and, in certain situations, could have a material adverse effect on our financial condition.
Income Taxes
We elected on our initial U.S. federal income tax return to be treated as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”). To qualify as a REIT, we must distribute at least 90% of our annual REIT taxable income to shareholders, and meet certain organizational and operational requirements, including asset holding requirements. As a REIT, we will generally not be subject to U.S. federal income tax on income that we distribute as dividends to our shareholders. If we fail to qualify as a REIT in any taxable year, we will be subject to U.S. federal income tax, including any applicable alternative minimum tax for open taxable years through 2017, on our taxable income at regular corporate income tax rates, and we could not deduct dividends paid to our shareholders in computing taxable income. Any resulting corporate liability could be substantial and could materially and adversely affect our net income and net cash available for distribution to shareholders. Unless we were entitled to relief under
certain Code provisions, we also would be disqualified from reelecting to be taxed as a REIT for the four taxable years following the year in which we failed to qualify as a REIT.
Subject to the restrictions imposed by our 7.875% senior secured notes due 2025 (as discussed below), our ability to make cash distributions to our shareholders in amounts exceeding 90% of our good faith estimate, as of the date on which the first quarterly dividend for the relevant year is declared, of our REIT taxable income for such year, determined without regard to the dividends paid deduction and excluding any capital gains, until we reduce our net leverage ratio. As a result, we may be required to record a provision in our Consolidated Financial Statements for U.S. federal income taxes related to the activities of the REIT and its passthrough subsidiaries for any undistributed income. We are subject to the statutory requirements of the locations in which we conduct business, and state and local income taxes are accrued as deemed required in the best judgment of management based on analysis and interpretation of respective tax laws.
We have elected to treat the subsidiaries through which we operate Uniti Fiber and Talk America as 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.
Deferred tax assets and liabilities are recognized under the asset and liability method for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax balances are adjusted to reflect tax rates based on currently enacted tax laws, which will be in effect in the years in which the temporary differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period of the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that such assets will be realized.
The Company is subject to restrictions on distributions to its shareholders based on our 7.875% senior secured notes due 2025. The restrictions permit the Company to make the minimum required distribution to maintain its status as a REIT, which is limited to 90% of our REIT taxable income, as estimated in good faith as of the date on which the first quarterly dividend for the relevant tax year is declared. The restrictions will remain in place until Company’s net leverage ratio (as defined) is below 5.75 : 1.00.
We recognize the benefit of tax positions that are "more likely than not" to be sustained upon examination based on their technical merit. The benefit of a tax position is measured at the largest amount that has a greater than 50 percent likelihood of being realized upon ultimate settlement. If applicable, we will report tax-related penalties and interest expense as a component of income tax expense.
The Company may be subject to state corporate level tax in a certain limited number of states on any built-in gain recognized from a sale of assets occurring within a ten-year recognition period after the Spin-Off. The five-year recognition period applicable for federal corporate level tax on any built-in gain recognized from a sale of assets occurring within five years after the Spin-Off expired in 2020
Revenue Recognition
Leasing revenues are primarily derived from providing access to or usage of leased networks and facilities. Leasing revenues are recognized on a straight-line basis over the initial lease term. Revenues derived from other telecommunications services, including broadband, long distance and enhanced service revenues are recognized monthly as services are provided. Sales of customer premise equipment are recognized when products are delivered to and accepted by customers.
Service revenues are primarily derived from providing broadband transport and backhaul communications services and are recognized when (i) persuasive evidence of an arrangement exists, (ii) the services have been provided to the customer, (iii) the sales price is fixed or determinable, and (iv) the collection of the sales price is reasonably assured. Services provided to the Company’s customers are pursuant to contractual fee-based arrangements, which generally provide for recurring fees charged for the use of designated portions of the Company’s network and typically range for a period of three to ten years. The Company’s revenue arrangements often include 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.
Impairment of Property, Plant and Equipment
We continually monitor events and changes in circumstances that could indicate that the carrying amount of our property, plant and equipment may not be recoverable or realized. When indicators of potential impairment suggest that the carrying value may not be recoverable, we assess the recoverability by estimating whether we will recover the carrying value of those assets through its undiscounted future cash flows and the eventual disposition of the asset. If, based on this analysis, we do not believe that we will be able to recover the carrying value of our property, plant and equipment, we would record an impairment loss to the extent that the carrying value exceeds the estimated fair value of the related assets. During the years ended December 31, 2021 and 2020, no impairment losses were recognized.
Business Combinations and Asset Acquisitions
We apply the acquisition method of accounting for acquisitions meeting the definition of a business combination or asset acquisition, where assets acquired and liabilities assumed are recorded at fair value at the date of each acquisition, and the results of operations are included with those of the Company from the dates of the respective acquisitions. The fair value of the acquired assets and liabilities are estimated using the income, market and/or cost approach. The income approach utilizes the present value of estimated future cash flows that a business or asset can be expected to generate, while under the market approach, the fair value of an asset or business reflects the price at which comparable assets are purchased under similar circumstances. Inherent in our preparation of cash flow projections are significant assumptions and estimates derived from a review of operating results, business plans, expected growth rates, capital expenditure plans, cost of capital and tax rates. We also make certain forecasts about future economic conditions, interest rates and other market data. Many of the factors used in assessing fair value are outside the control of management. Small changes in these assumptions or estimates could materially affect the cash flow projections, and therefore could affect the estimated fair value. Impact these assumptions or estimates include customer retention, execution of our business plans, which impact growth, cost escalation impacting margin, the level of capital expenditures required to sustain our growth and market factors, including stock price fluctuations and increased rates, impacting our cost of capital.
For acquisitions meeting the definition of a business combination, any excess of the purchase price paid by the Company over the amounts recognized for assets acquired and liabilities assumed is recorded as goodwill. Accounting Standards Codification (“ASC”) 805, Business Combinations (“ASC 805”), also requires acquirers to, among other things, estimate the acquisition date fair value of any contingent consideration and recognize any subsequent changes in the fair value of contingent consideration in earnings. When provisional amounts are initially recorded, the Company continues to evaluate acquisitions for a period not to exceed one year after the applicable acquisition date of each transaction to determine whether any additional adjustments are needed to the allocation of the purchase price paid for the assets acquired and liabilities assumed.
For acquisitions meeting the definition of an asset acquisition, the fair value of the consideration transferred, including transaction costs, is allocated to the assets acquired and liabilities assumed based on their relative fair values. There are significant judgments and estimates used in determining the fair values of the assets acquired and liabilities assumed, which include assumptions with respect to items such as replacement cost, land value, assemblage factor, discount rate, lease-up period, implied rents per strand mile, and useful life. No goodwill is recognized in an asset acquisition.
Goodwill
As of December 31, 2021 and 2020, all of our goodwill is included in our Fiber Infrastructure segment. Goodwill is recognized for the excess of purchase price over the fair value of net assets of businesses acquired. Goodwill is
reviewed for impairment at least annually. In accordance with ASC 350-20, Intangibles-Goodwill and Other, we evaluate goodwill for impairment between annual impairment tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Unless circumstances otherwise dictate, the annual impairment test is performed in the fourth quarter. Application of the goodwill impairment test requires significant judgment, including: the identification of reporting units; assignment of assets and liabilities to reporting units; and assignment of goodwill to reporting units. As a result of our 2021 annual goodwill impairment test, we concluded the implied fair value of our Fiber Infrastructure reporting unit approximates its carrying value.
We estimate the fair value of our reporting units (which are our segments) using a combination of an income approach based on the present value of estimated future cash flows and a market approach based on market data of comparable businesses and acquisition multiples paid in recent transactions. We evaluate the appropriateness of each valuation methodology in determining the weighting applied to each methodology in the determination of the concluded fair value. If the carrying value of a reporting unit's net assets is less than its fair value, no indication of impairment exists. If the carrying amount of the reporting unit is greater than the fair value of the reporting unit, an impairment loss must be recognized for the excess and recorded in the Consolidated Statements of Income (Loss) not to exceed the carrying value of goodwill.
We performed our goodwill impairment analysis during the fourth quarter of 2021. We concluded that the fair value of the Fiber Infrastructure reporting unit, estimated using a combination of the income approach and market approach, approximates its carrying amount. Accordingly, we recorded no goodwill impairment in the Fiber Infrastructure reporting unit for the year ended December 31, 2021. During the year ended December 31, 2020, we recorded a $71 million goodwill impairment. During the year ended December 31, 2019, no impairment loss was recorded.
Inherent in our preparation of cash flow projections are significant assumptions and estimates derived from a review of our operating results and business plans, which includes expected revenue and expense growth rates, capital expenditure plans and cost of capital. In determining these assumptions, we consider our ability to execute on our plans, future economic conditions, interest rates and other market data. Many of the factors used in assessing fair value are outside the control of management, and these assumptions and estimates may change in future periods. Small changes in these assumptions or estimates could materially affect our cash flow projections, and therefore could affect the likelihood and amount of potential impairment in future periods. Potential events that could negatively impact these assumptions or estimates may include customer losses or poor execution of our business plans, which impact revenue growth, cost escalation impacting margin, the level of capital expenditures required to sustain our growth and market factors, including stock price fluctuations and increased rates, impacting our cost of capital. For example, if we were to experience a significant delay in our permitting process in the construction of our fiber networks, the timing of effected cash flows could impact long term growth rates and negatively impact the income approach, leading to potential impairment. As a result, should our expectations of average projected revenue growth percentage, average projected EBITDA margin percentage and/or average projected capital expenditures as a percentage of revenue change, we may experience future impairment to goodwill (while other assumptions remain constant). Furthermore, a deterioration in market factors such as stock prices or increased interest rates, and/or declines in acquisition multiples utilized in the market approach could affect the likelihood and amount of potential impairment.
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 in October 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 on October 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 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 are limited to $225 million per year in 2021 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 Windstream), available borrowings under our credit agreement by and among the Operating Partnership, CSL Capital, LLC and Uniti Group Finance 2019 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 December 31, 2021, we had cash and cash equivalents of $58.9 million and approximately $360.5 million of borrowing availability under our Revolving Credit Facility. Subsequent to December 31, 2021, other than $13.4 million of Growth Capital Improvements, 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 debt instruments would impose restrictions on our ability to pay dividends.
Year Ended December 31,
(Thousands)
Cash flow from operating activities:
Net cash provided by operating activities
$
499,157
$
157,233
Cash provided by operating activities totaled $499.2 million and $157.2 million for the years ended December 31, 2021 and 2020, respectively. Cash provided by operating activities is primarily attributable to our leasing activities, a substantial portion of which is derived from the Windstream Leases.
Year Ended December 31,
(Thousands)
Cash flow from investing activities:
Asset acquisitions
$
-
$
(73,407
)
Proceeds from sale of operations
62,113
-
Proceeds from sale of other equipment
1,487
-
Proceeds from sale of real estate, net of cash
1,034
391,885
Other capital expenditures
(385,855
)
(317,084
)
Net cash (used in) provided by investing activities
$
(321,221
)
$
1,394
Cash used in investing activities was $321.2 million for the year ended December 31, 2021 and is driven by capital expenditures, primarily related to our Uniti Fiber and Uniti Leasing businesses for deployment of network assets but also includes $221.5 million of Growth Capital Improvements, partially offset by proceeds from the sale of the Uniti Fiber Northeast operations to Everstream ($62.1 million). Cash provided by investing activities for the year ended December 31, 2020 was $1.4 million, which was driven by proceeds from the sale of our U.S. tower business ($225.1 million), proceeds from the sale of our Midwest fiber network ($166.9 million), partially offset by capital expenditures ($317.1 million), which are primarily related to our Uniti Fiber and Uniti Leasing businesses for the deployment of network assets but also includes $84.7 million of Growth Capital Improvements, and expenditures of $73.4 million in connection with the Asset Purchase Agreement.
Year Ended December 31,
(Thousands)
Cash flow from financing activities:
Repayment of debt
$
(2,260,000
)
$
(2,044,728
)
Proceeds from issuance of notes
2,380,000
2,250,000
Dividends paid
(141,371
)
(135,676
)
Payments of settlement obligation
(190,924
)
-
Payments of contingent consideration
(2,979
)
(15,713
)
Distributions paid to noncontrolling interests
(1,700
)
(2,322
)
Borrowings under revolving credit facility
310,000
170,000
Payments under revolving credit facility
(220,000
)
(635,019
)
Finance lease payments
(2,019
)
(3,702
)
Payments for financing costs
(27,660
)
(50,875
)
Settlement Common Stock
-
244,550
Costs related to early repayment of debt
(36,486
)
-
Employee stock purchase program
Net share settlement
(4,100
)
(1,097
)
Net cash used in financing activities
$
(196,567
)
$
(223,906
)
Cash used in financing activities was $196.6 million for the year ended December 31, 2021, which was primarily driven by the repayment of the 2023 Notes, 2023 Secured Notes and 2024 Notes ($2.26 billion), dividend payments ($141.4 million), payments for financing costs ($27.7 million), payment of settlement obligation ($190.9 million), 2023 Notes tender premium payment ($17.6 million), 2024 Notes early redemption payment ($10.6 million), 2023 Secured Notes early redemption payment ($8.3 million) and contingent consideration payments ($3.0 million), partially offset by proceeds from the issuance of the 2030 Notes, 2029 Notes and 2028 Secured Notes ($2.38 billion) and net borrowings under the Revolving Credit Facility ($90.0 million). Cash used in financing activities was $223.9 million for the year ended December 31, 2020, which was primarily driven by the repayment of senior secured term loan B ($2.04 billion), net payments under the Revolving Credit Facility ($465.0 million), dividend payments ($135.7 million) and payments for financing costs ($50.9 million), contingent consideration payments ($15.7 million), partially offset by the proceeds from the issuance of the 2025 Secured Notes ($2.25 billion) and the issuance of the Settlement Common Stock ($244.6 million).
Windstream Master Lease and Windstream Leases
As described in Note 5 to our consolidated financial statements contained in Part II, Item 8 “Financial Statements and Supplementary Data,” on September 18, 2020, in connection with Windstream’s emergence from bankruptcy and the implementation of the Settlement, Uniti and Windstream bifurcated the Master Lease and entered into the Windstream Leases that each expire on April 30, 2030. The aggregate initial annual rent under the Windstream Leases is equal to the annual rent under the Master Lease previously in effect. The Windstream Leases contain cross-guarantees and cross-default provisions, which will remain effective as long as Windstream or an affiliate is the tenant under both of the Windstream Leases and unless and until the landlords under the ILEC MLA are different from the landlords under the CLEC MLA. The Windstream Leases permit Uniti to transfer its rights and obligations and otherwise monetize or encumber the Windstream Leases, together or separately, so long as Uniti does not transfer interests in either Windstream Lease to a Windstream competitor.
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”). 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 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 are limited to $225 million per year in
2021 through 2024; $175 million per year in 2025 and 2026; and $125 million per year in 2027 through 2029. If the cost incurred by Windstream (or the successor tenant under a Windstream Lease) for Growth Capital Improvements in any calendar year exceeds the annual limit for such calendar year, Windstream (or such tenant, as the case may be) may submit such excess costs for reimbursement in any subsequent year and such excess costs shall be funded from the annual commitment amounts in such subsequent period. In addition, to the extent that reimbursements for Growth Capital Improvements funded in any calendar year during the term is less than the annual limit for such calendar year, the unfunded amount in any calendar year will carry-over and may be added to the annual limits for subsequent calendar years, subject to an annual limit of $250 million in any calendar year, except that, during calendar year 2021, Uniti’s combined total obligation to fund Growth Capital Improvements may exceed $250 million to the extent of any unfunded excess amounts from calendar year 2020.
Starting on the first anniversary of each installment of reimbursement for a Growth Capital Improvement, the rent payable by Windstream under the applicable Windstream Lease will increase by an amount equal to 8.0% (the “Rent Rate”) of such installment of reimbursement. The Rent Rate will thereafter increase to 100.5% of the prior Rent Rate on each anniversary of each reimbursement. In the event that the tenant’s interest in either Windstream Lease is transferred by Windstream under the terms thereof (unless transferred to the same transferee), or if Uniti transfers its interests as landlord under either Windstream Lease (unless to the same transferee), the reimbursement rights and obligations will be allocated between the ILEC MLA and the CLEC MLA by Windstream, provided that the maximum that may be allocated to the CLEC MLA following such transfer is $20 million per year. If Uniti fails to reimburse any Growth Capital Improvement reimbursement payment or equipment loan funding request as and when it is required to do so under the terms of the Windstream Leases, and such failure continues for thirty (30) days, then such unreimbursed amounts may be applied as an offset against the rent owed by Windstream under the Windstream Leases (and such amounts will thereafter be treated as if Uniti had reimbursed them).
Uniti and Windstream have entered into separate ILEC and CLEC Equipment Loan and Security Agreements (collectively “Equipment Loan Agreement”) in which Uniti will provide up to $125 million (limited to $25 million in any calendar year) of the $1.75 billion of Growth Capital Improvements commitments discussed above in the form of loans for Windstream to purchase equipment related to network upgrades or to be used in connection with the Windstream Leases. Interest on these loans will accrue at 8% from the date of the borrowing. All equipment financed through the Equipment Loan Agreement is the sole property of Windstream; however, Uniti will receive a first-lien security interest in the equipment purchased with the loans. If the cost incurred by Windstream (or the successor tenant under a Windstream Lease) for Growth Capital Improvements in any calendar year exceeds the annual limit for such calendar year, Windstream (or such tenant, as the case may be) may submit such excess costs for reimbursement in any subsequent year and such excess costs shall be funded from the annual commitment amounts in such subsequent period.
At-the-Market Common Stock Offering Program
We have 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 the ATM Program to sell shares of common stock having an aggregate offering price of up to $250 million. The ATM Program supersedes and replaces the $250 million program we commenced on September 2, 2016, which had approximately $117.1 million available for issuance upon termination. During the year ended December 31, 2021, we did not make any sales under the refreshed ATM Program. This program is 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.
UPREIT Operating Partnership Units
During 2017, the Company completed its 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 direct or indirect parent company of, among others, CSL Capital, LLC, Uniti Group Finance 2019 Inc. and Uniti Fiber Holdings Inc.
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”). The limited partner equity
interests in the Operating Partnership are exchangeable on a one-for-one basis for shares of our common stock or, at our election, cash of equivalent value. We believe that this structure will facilitate our ability to acquire individual properties and portfolios of properties by enabling us to structure transactions which will defer taxes payable by a seller while preserving our available cash for other purposes, including the possible payment of dividends. We issued limited partnership interests as part of the acquisition consideration for the 2017 acquisitions of Hunt Telecommunications, LLC and Southern Light, LLC.
Senior Notes
At December 31, 2021, the Operating Partnership and certain of its subsidiaries had outstanding $570.0 million aggregate principal amount of 4.750% Senior Secured Notes due April 15, 2028 (the “2028 Secured Notes”), $2.25 billion aggregate principal amount of 7.875% Senior Secured Notes due February 15, 2025 (the “2025 Secured Notes”), $1.11 billion aggregate principal amount of 6.50% Senior Notes due February 15, 2029 (the “2029 Notes”) and $700 million aggregate principal amount of 6.00% Senior Unsecured Notes due January 15, 2030 (the “2030 Notes”).
On February 2, 2021, the Operating Partnership, Uniti Group Finance 2019 Inc. and CSL Capital, LLC (hereinafter, the “Borrowers”) issued $1.11 billion aggregate principal amount of the 2029 Notes and used the net proceeds to fund the tender offer and subsequent redemption of all outstanding 2023 Notes.
On April 20, 2021, the Borrowers issued $570 million aggregate principal amount of the 2028 Secured Notes and used the net proceeds from the offering to fund the redemption in full of the $550.0 million aggregate principal amount of the 2023 Secured Notes on May 6, 2021.
On October 13, 2021, Uniti Group LP, Uniti Fiber Holdings Inc., Uniti Group Finance 2019 Inc. and CSL Capital, LLC issued $700 million aggregate principal amount of 6.00% Senior Notes due 2030 and used the proceeds to fund the redemption in full of the 2024 Notes on December 15, 2021.
In connection with the up-REIT Reorganization, the Operating Partnership replaced the Company and assumed its obligations as an obligor under the Facilities. The Company is a guarantor to all series of senior notes, including the 4.00% exchangeable notes described below, and under the Credit Agreement. Separate financial statements of the Operating Partnership have not been included since the Operating Partnership is not a registrant.
Exchangeable Notes
On June 28, 2019, Uniti Fiber Holdings Inc. issued $345 million aggregate principal amount of 4.00% Exchangeable Senior Notes due June 15, 2024. 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 Holding Inc.’s election.
Credit Agreement
The Borrowers are party to the Credit Agreement, which as of December 31, 2020, provided for a $60.5 million non-extended revolving credit facility that matures on April 24, 2022 (the “Non-Extended Revolving Credit Facility”) and a $500 million revolving credit facility that matures on December 10, 2024 (the “Extended Revolving Credit Facility” and together with Non-Extended Revolving Credit facility, the “Revolving Credit Facility”), which provide us with the ability to obtain revolving loans as well as swingline loans and letters of credit from time to time. All obligations under the Credit Agreement are guaranteed by (i) the Company and (ii) certain of the Operating Partnership’s subsidiaries (the “Subsidiary Guarantors”) and are secured by substantially all of the assets of the Borrowers and the Subsidiary Guarantors.
The Credit Agreement previously provided for a term loan facility, of which all $2.05 billion of outstanding loans was repaid in full in connection with the issuance of the 2025 Secured Notes in February 2020.
The Borrowers are subject to customary covenants under the Credit Agreement, including an obligation to maintain a consolidated secured leverage ratio, as defined in the Credit Agreement, not to exceed 5.00 to 1.00. We are permitted, subject to customary conditions, to incur other indebtedness, so long as, on a pro forma basis after giving effect to any such indebtedness, our consolidated total leverage ratio, as defined in the Credit Agreement, does not exceed 6.50 to 1.00 and, if such debt is secured, our consolidated secured leverage ratio, as defined in the Credit Agreement, does not exceed 4.00 to 1.00. In addition, the Credit Agreement contains customary events of default, including a cross default provision whereby the failure of the Borrowers or certain of their subsidiaries to make payments under other debt obligations, or the occurrence of certain events affecting those other borrowing arrangements, could trigger an obligation to repay any amounts outstanding under the Credit Agreement. In particular, a repayment obligation could be triggered if (i) the Borrowers or certain of their subsidiaries fail to make a payment when due of any principal or interest on any other indebtedness aggregating $75.0 million or more, or (ii) an event occurs that causes, or would permit the holders of any other indebtedness aggregating $75.0 million or more to cause, such indebtedness to become due prior to its stated maturity. As of December 31, 2021, the Borrowers were in compliance with all of the covenants under the Credit Agreement.
Borrowings under (a) the Non-Extended Revolving Credit Facility bear interest at a rate equal to either a base rate plus an applicable margin ranging from 3.75% to 4.25% or a eurodollar rate plus an applicable margin ranging from 4.75% to 5.25% and (b) the Extended Revolving Credit Facility bear interest at a rate equal to either a base rate plus an applicable margin ranging from 2.75% to 3.50% or a eurodollar rate plus an applicable margin ranging from 3.75% to 4.50%, in each case, calculated in a customary manner and determined based on our consolidated secured leverage ratio. We are required to pay a quarterly commitment fee under the Revolving Credit Facility equal to 0.50% of the average amount of unused commitments during the applicable quarter (subject to a step-down to 0.40% per annum of the average amount of unused commitments during the applicable quarter upon achievement of a consolidated secured leverage ratio not to exceed a certain level), as well as quarterly letter of credit fees equal to the product of (A) the applicable margin with respect to eurodollar borrowings and (B) the average amount available to be drawn under outstanding letters of credit during such quarter.
Interest Rate Swaps
We are party to interest rate swap agreements that we entered into to mitigate interest rate risk associated with our now repaid variable rate term loan facility under the Credit Agreement. These interest rate swaps are designated as cash flow hedges and have a notional value of $2.02 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%.
As result of the repayment of the term loan facility in February of 2020 (discussed above), the Company entered into receive-fixed interest rate swaps (the “Replacement Swaps”) to offset its existing pay-fixed interest rate swaps (the “Existing Swaps”) that were designated as cash flow hedges of interest payments initially associated with the term loan facility. On February 10, 2020, the Company discontinued hedge accounting on its Existing Swaps as the hedge accounting requirements were no longer met. Amounts in accumulated other comprehensive (loss) income associated with the Existing Swaps as of the date of dedesignation, will be reclassified to interest expense as the hedged interest payments impact earnings. The net effect of these offsetting interest rate swaps will result in a monthly cash outflow of approximately $1.1 million through October 2022.
Outlook
We anticipate continuing to invest in our network infrastructure across our Uniti Leasing and Uniti Fiber portfolios. We anticipate declaring dividends for the 2022 tax year to comply with our REIT distribution requirements. We anticipate that we will partially finance these needs, as well as operating expenses (including our debt service obligations), from our cash on hand and cash flows provided by operating activities. In December 2020, we amended the Credit Agreement to increase the commitments under our Revolving Credit Facility that mature on December 10, 2024 from $418 million to $500 million and extended the maturity date to December 10, 2024. We refinanced and extended the maturity of our 2023 Notes through the issuance of our 2029 Notes. We expect to access the capital markets to fund Growth Capital Improvements over the term of the Windstream Leases, business operations, announced investment activities, capital expenditures, debt service and distributions to our shareholders. We are
closely monitoring the equity and debt markets and will seek to access them again promptly when we determine market conditions are appropriate. Our debt covenants currently do not permit us to incur material additional debt.
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 would be subject to a shortfall in liquidity in the future which could lead to a reduction in our capital expenditures and/or dividends and, in an extreme case, our ability to pay our debt service obligations. If this shortfall occurs rapidly and with little or no notice, it could limit our ability to address the shortfall on a timely basis.
In 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.
Contractual Obligations
We enter into various contractual arrangements as a part of our continued operations. Many of these contractual obligations are discussed in the notes (“Notes”) to our consolidated financial statements contained in Part II, Item 8 “Financial Statements and Supplementary Data”. As of December 31, 2021, material obligations discussed in the Notes included principal and interest payments on our long-term debt discussed above and in Note 12, operating and finance leases discussed in Note 5, and reimbursement commitments for growth capital improvements and cash payments related to the settlement agreement discussed in Note 16.
In addition, we have material purchase commitments related to network deployment for success-based projects for which we have a signed customer contract before we commit resources to expand our network. As of December 31, 2021, purchase commitments totaled $21.0 million due in 2022 and $4.0 million due in 2023. Projections of future cash flows are subject to substantial uncertainty as discussed throughout Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and particularly in Part I, Item 1A “Risk Factors” of this Annual Report on Form 10-K. Debt agreements may be renewed or refinanced if we determine it is advantageous to do so.
Dividends
We have 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. Subject to the restrictions imposed by our 7.875% senior secured notes due 2025, in order to maintain our REIT status, we intend to make 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.
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, 2020 - December 31, 2020
January 4, 2021
$
0.15
December 15, 2020
January 1, 2021 - March 31, 2021
April 16, 2021
$
0.15
April 1, 2021
April 1, 2021 - June 30, 2021
July 2, 2021
$
0.15
June 18, 2021
July 1, 2021 - September 30, 2021
October 1, 2021
$
0.15
September 17, 2021
October 1, 2021 - December 31, 2021
January 3, 2022
$
0.15
December 17, 2021
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 the ongoing COVID-19 pandemic, we may take further measures to conserve cash, which may include a suspension, delay or reduction in our dividend. In addition, until such time our consolidated net leverage ratio (as defined in the indenture governing the 2025 Secured Notes) is no greater than 5.75 to 1.0, our 2025 Secured Notes generally limit our ability 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.
Capital Expenditures
Year Ended December 31, 2021
(Thousands)
Success Based
Maintenance
Integration
Non-Network
Total
Capital expenditures:
Leasing
$
1,753
$
-
$
-
$
-
$
1,753
Growth capital improvements
221,498
-
-
-
221,498
Fiber Infrastructure
152,219
8,342
1,412
162,463
Corporate
-
-
-
Total capital expenditures
$
375,470
$
8,342
$
$
1,553
$
385,855
We categorize our capital expenditures as either (i) success-based, (ii) maintenance, (iii) integration or (iv) corporate and non-network. We define success-based capital expenditures as those related to installing existing or anticipated contractual 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 and Uniti Fiber businesses and expect that cash on hand and cash flows provided by operating activities will be sufficient to support these investments. We have the right, but not the obligation (except for Growth Capital Improvements under the terms of the Windstream Leases), to reimburse growth capital expenditures in certain of our lease arrangements where we are the lessor.
Uniti’s total annual reimbursement commitments to Windstream for the Growth Capital Improvements is discussed above in this Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations in “Liquidity and Capital Resources-Windstream Master Lease and Windstream Leases.” Growth Capital Improvements are treated as success-based capital improvements based on the rents paid with respect to such amounts.
If circumstances warrant, we may need to take measures to conserve cash, which may include a suspension, delay or reduction in success-based capital expenditures. We continually assess our capital expenditure plans in light of developments the impact COVID-19 has on our business and that of our tenants and customers.

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
In fiscal year 2021, our primary market risk exposure was interest rate risk with respect to our variable rate indebtedness under our Revolving Credit Facility, which had an aggregate principal amount of $200 million as of December 31, 2021. A hypothetical 10% change in interest rates effective at December 31, 2021, would have had a $0.9 million impact on Uniti’s results of operations for the year ended December 31, 2021.
An increase in interest rates could make the financing of any acquisition by us more costly. Rising interest rates could also limit our ability to refinance our debt when it matures or cause us to pay higher interest rates upon refinancing and increase interest expense on refinanced indebtedness.

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data.
Uniti Group Inc.
Consolidated Financial Statements
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID: 185 and 238)
Uniti Group Inc.
Consolidated Balance Sheets
Consolidated Statements of Income (Loss)
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Shareholders’ Deficit
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
1. Organization and Description of Business
2. Basis of Presentation
3. Summary of Significant Accounting Policies
4. Revenues
5. Leases
6. Business Combinations, Asset Acquisitions and Dispositions
7. Investment in Unconsolidated Entities
8. Fair Value of Financial Instruments
9. Property, Plant and Equipment
10. Derivative Instruments and Hedging Activities
11. Goodwill and Intangible Assets
12. Notes and Other Debt
13. Stock-Based Compensation
14. Earnings Per Share
15. Segment Information
16. Commitments and Contingencies
17. Accumulated Other Comprehensive Income
18. Income Taxes
19. Supplemental Cash Flow Information
20. Capital Stock
21. Dividends (Distributions)
22. Employee Benefit Plan
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Uniti Group Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Uniti Group Inc. and subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of income (loss), comprehensive income (loss), shareholders’ deficit, and cash flows for the years then ended, and the related notes and financial statement schedules I to III (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years then ended, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 25, 2022 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 3 to the consolidated financial statements, the Company has changed its method of accounting for certain financial instruments with characteristics of liabilities and equity as of January 1, 2021 due to the adoption of Accounting Standards Update No. 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in an Entity’s Own Equity (Subtopic 815-40).
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Fair value of the Fiber Infrastructure reporting unit
As discussed in Notes 3 and 11 to the consolidated financial statements, the Company’s consolidated goodwill balance was $601.9 million as of December 31, 2021, all of which is associated with the Fiber Infrastructure segment. The Company performs goodwill impairment testing on an annual basis and whenever events or changes in circumstances occur that would more likely than not reduce the fair value of the reporting unit below its carrying amount. The Company estimated the fair value of the Fiber Infrastructure reporting unit using a combination of an income approach based on the present value of estimated future cash flows and a market approach based on acquisition multiples paid for fiber companies in recent market transactions.
We identified the evaluation of the fair value of the Fiber Infrastructure reporting unit as a critical audit matter. We performed a sensitivity analysis to determine the significant assumptions used to estimate the fair value of the reporting unit. Specifically, forecasted revenue, profit margin, and capital expenditures were challenging to test as they represent subjective estimates of future operations. The discount rate, long-term growth rate, terminal capitalization rate, and acquisition multiple were also challenging to test as they represent subjective judgments about the investment market for infrastructure operations and assets. Minor changes to these assumptions, either individually or in aggregate, could have a significant effect on the Company’s assessment of the fair value of the reporting unit. Additionally, the audit effort associated with the evaluation of the fair value of the reporting unit required specialized skills and knowledge.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s reporting unit fair value determination. This included controls related to forecasted revenue, profit margin, capital expenditures as well as the discount rate, long-term growth rate, terminal capitalization rate, and acquisition multiple. We evaluated the forecasted revenue and profit margins by comparing them to peer company analyst reports. We also obtained an understanding of the Company’s intent to carry out particular courses of action by inspecting their written plans and other relevant documentation, and assessed how the Company incorporated those planned actions into forecasted revenue, profit margins and capital expenditures. We compared the Company’s historical revenue, profit margin and capital expenditure forecasts to actual results to assess the Company’s ability to accurately forecast. We evaluated the Company’s forecasted revenue, profit margin, and capital expenditures by comparing them to historical results. We also evaluated whether the information used in the determination of the fair value of the reporting unit was consistent with other information used internally, presented to the Board of Directors, and used to develop other externally presented financial information. In addition, we involved a valuation professional with specialized skills and knowledge, who assisted in evaluating the Company’s discount rate, long-term growth rate, terminal capitalization rate and acquisition multiples by comparing them to market data for comparable entities and transactions.
We have served as the Company’s auditor since 2020.
/s/ KPMG LLP
Dallas, Texas
February 25, 2022
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Uniti Group Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Uniti Group Inc. and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2021 and 2020, the related consolidated statements of income (loss), comprehensive income (loss), shareholders’ deficit, and cash flows for the years then ended, and the related notes and financial statement schedules I to III (collectively, the consolidated financial statements), and our report dated February 25, 2022 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Dallas, Texas
February 25, 2022
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Uniti Group Inc.
Opinion on the Financial Statements
We have audited the consolidated statements of income, of comprehensive income (loss), of shareholders’ deficit and of cash flows of Uniti Group Inc. and its subsidiaries (the “Company”) for the year ended December 31, 2019, including the related notes and schedule of condensed financial information of the Registrant for the year ended December 31, 2019, and schedule of valuation and qualifying accounts for the year ended December 31, 2019 listed in the accompanying index appearing under Item 15 (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the results of operations and cash flows of the Company for the year ended December 31, 2019 in conformity with accounting principles generally accepted in the United States of America.
Substantial Doubt About the Company’s Ability to Continue as a Going Concern
The consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 (not presented herein) to the consolidated financial statements, the Company’s most significant customer, Windstream Holdings, Inc., which accounts for approximately 65.0% of consolidated total revenues for the year ended December 31, 2019, filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code, and uncertainties surrounding potential impacts to the Company resulting from Windstream Holdings, Inc.’s bankruptcy filing raise substantial doubt about the Company’s ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2 (not presented herein). The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Little Rock, Arkansas
March 12, 2020
We served as the Company's auditor from 2014 to 2020.
Uniti Group Inc.
Consolidated Balance Sheets
(Thousands, except par value)
December 31, 2021
December 31, 2020
Assets:
Property, plant and equipment, net
$
3,508,939
$
3,273,353
Cash and cash equivalents
58,903
77,534
Accounts receivable, net
38,455
62,952
Goodwill
601,878
601,878
Intangible assets, net
364,630
390,725
Straight-line revenue receivable
41,323
13,107
Other assets, net
119,171
152,883
Investments in unconsolidated entities
64,223
66,043
Deferred income tax assets, net
11,721
-
Assets held for sale
-
93,343
Total Assets
$
4,809,243
$
4,731,818
Liabilities and Shareholders' Deficit:
Liabilities:
Accounts payable, accrued expenses and other liabilities, net
$
144,223
$
146,144
Settlement payable (Note 16)
239,384
418,840
Intangible liabilities, net
177,786
187,886
Accrued interest payable
109,826
95,338
Deferred revenue
1,134,236
995,123
Derivative liability, net
10,413
22,897
Dividends payable
1,264
36,725
Deferred income tax liabilities, net
-
10,540
Finance lease obligations
15,348
15,468
Contingent consideration
-
2,957
Notes and other debt, net
5,090,537
4,816,524
Liabilities held for sale
-
55,752
Total liabilities
6,923,017
6,804,194
Commitments and contingencies (Note 16)
Shareholders' Deficit:
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: 234,779 shares at December 31, 2021 and 231,262 at December 31, 2020
Additional paid-in capital
1,214,830
1,209,141
Accumulated other comprehensive loss
(9,164
)
(20,367
)
Distributions in excess of accumulated earnings
(3,333,481
)
(3,330,455
)
Total Uniti shareholders' deficit
(2,127,792
)
(2,141,658
)
Noncontrolling interests:
Operating partnership units
13,893
69,157
Cumulative non-voting convertible preferred stock, $0.01 par value, 3 shares authorized, 1 issued and outstanding
Total shareholders' deficit
(2,113,774
)
(2,072,376
)
Total Liabilities and Shareholders' Deficit
$
4,809,243
$
4,731,818
The accompanying notes are an integral part of these consolidated financial statements.
Uniti Group Inc.
Consolidated Statements of Income (Loss)
Year Ended December 31,
(Thousands, except per share data)
Revenues:
Leasing
$
801,497
$
745,915
$
716,640
Fiber Infrastructure
299,025
314,363
315,605
Tower
-
6,112
14,693
Consumer CLEC
-
10,673
Total revenues
1,100,522
1,067,041
1,057,611
Costs and Expenses:
Interest expense, net
446,296
497,128
390,112
Depreciation and amortization
290,942
329,403
405,754
General and administrative expense
101,176
104,975
102,900
Operating expense (exclusive of depreciation, accretion and amortization)
146,869
159,337
160,024
Settlement expense (Note 16)
-
650,000
-
Goodwill impairment (Note 3)
-
71,000
-
Transaction related and other costs
7,544
63,875
43,708
Gain on sale of real estate (Note 6)
(442
)
(86,267
)
(28,995
)
Gain on sale of operations (Note 6)
(28,143
)
-
-
Other expense (income), net
18,553
11,703
(31,463
)
Total costs and expenses
982,795
1,801,154
1,042,040
Income (loss) before income taxes and equity in earnings from unconsolidated entities
117,727
(734,113
)
15,571
Income tax (benefit) expense
(4,916
)
(15,203
)
4,663
Equity in earnings from unconsolidated entities
(2,102
)
(98
)
-
Net income (loss)
124,745
(718,812
)
10,908
Net income (loss) attributable to noncontrolling interests
1,085
(12,511
)
Net income (loss) attributable to shareholders
123,660
(706,301
)
10,582
Participating securities' share in earnings
(1,077
)
(1,078
)
(549
)
Dividends declared on convertible preferred stock
(10
)
(9
)
(656
)
Amortization of discount on convertible preferred stock
-
-
(993
)
Net income (loss) attributable to common shareholders
$
122,573
$
(707,388
)
$
8,384
Earnings (loss) per common share (Note 14):
Basic
$
0.53
$
(3.47
)
$
0.04
Diluted
$
0.51
$
(3.47
)
$
0.04
Weighted-average number of common shares outstanding
Basic
232,888
203,600
187,358
Diluted
264,077
203,600
187,358
The accompanying notes are an integral part of these consolidated financial statements.
Uniti Group Inc.
Consolidated Statements of Comprehensive Income (Loss)
Year Ended December 31,
(Thousands)
Net income (loss)
$
124,745
$
(718,812
)
$
10,908
Other comprehensive income (loss):
Unrealized loss on derivative contracts
-
(7,036
)
(54,612
)
Changes in foreign currency translation
-
-
(63
)
Interest rate swap termination
11,317
10,155
-
Other comprehensive income (loss)
11,317
3,119
(54,675
)
Comprehensive income (loss)
136,062
(715,693
)
(43,767
)
Comprehensive income (loss) attributable to noncontrolling interest
1,199
(12,467
)
(1,128
)
Comprehensive income (loss) attributable to common shareholders
$
134,863
$
(703,226
)
$
(42,639
)
The accompanying notes are an integral part of these consolidated financial statements.
Uniti Group Inc.
Consolidated Statements of Shareholders’ Deficit
Preferred Stock
Common Stock
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
(Loss) Income
Distributions
in Excess of
Accumulated
Earnings
Noncontrolling
Interest - OP
Units
Noncontrolling
Interest - Non-
voting
Preferred
Shares
Total
Shareholders'
Deficit
(Thousands, except share data)
Shares
Amount
Shares
Amount
Balance at December 31, 2018
-
$
-
180,535,971
$
$
757,517
$
30,105
$
(2,373,218
)
$
92,375
$
-
$
(1,493,203
)
2019 Activity:
Cumulative effect adjustment for adoption of new accounting standard
-
-
-
-
-
-
(61,826
)
-
-
(61,826
)
Net income
-
-
-
-
-
-
10,582
-
10,908
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 income
-
-
-
-
-
(53,547
)
-
(1,128
)
-
(54,675
)
Common stock dividends declared ($0.37 per share)
-
-
-
-
-
-
(69,403
)
-
-
(69,403
)
Distributions to noncontrolling interest
-
-
-
-
-
-
-
(1,329
)
-
(1,329
)
Exchange of noncontrolling interest
-
-
666,576
-
6,540
-
-
(6,540
)
-
-
Convertible preferred stock dividends
-
-
-
-
-
-
(875
)
-
-
(875
)
Equity settlement convertible preferred stock
-
-
8,677,163
87,499
-
-
-
-
87,500
Payments related to tax withholding for stock-based compensation
-
-
-
-
(1,834
)
-
-
-
-
(1,834
)
Stock-based compensation
-
-
357,066
-
10,808
-
-
-
-
10,808
Equity settlement contingent consideration
-
-
645,385
-
11,178
-
-
-
-
11,178
Issuance of common stock - employee stock purchase plan
-
-
83,287
-
-
-
-
-
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 December 31, 2019
-
$
-
192,141,634
$
$
951,295
$
(23,442
)
$
(2,494,740
)
$
83,704
$
-
$
(1,483,164
)
2020 Activity:
Net loss
-
-
-
-
-
(706,301
)
(12,511
)
-
(718,812
)
Other comprehensive income
-
-
-
-
-
3,075
-
-
3,119
Common stock dividends declared ($0.60 per share)
-
-
-
-
-
-
(129,414
)
-
-
(129,414
)
Distributions to noncontrolling interest
-
-
-
-
-
-
-
(2,080
)
-
(2,080
)
Cumulative non-voting convertible preferred stock
-
-
-
-
-
-
-
-
Payments related to tax withholding for stock-based compensation
-
-
-
-
(1,097
)
-
-
-
-
(1,097
)
Stock-based compensation
-
-
390,066
-
13,721
-
-
-
-
13,721
Issuance of common stock - employee stock purchase plan
-
-
96,788
-
-
-
Settlement Common Stock (Note 20)
-
-
38,633,470
244,546
-
-
-
-
244,550
Balance at December 31, 2020
-
$
-
231,261,958
$
$
1,209,141
$
(20,367
)
$
(3,330,455
)
$
69,157
$
$
(2,072,376
)
2021 Activity:
Cumulative effect adjustment for adoption of new accounting standard
-
-
-
-
(59,908
)
-
14,598
-
-
(45,310
)
Net income
-
-
-
-
-
-
123,660
1,085
-
124,745
Other comprehensive income
-
-
-
-
-
11,203
-
-
11,317
Common stock dividends declared ($0.60 per share)
-
-
-
-
-
-
(141,284
)
-
-
(141,284
)
Distributions to noncontrolling interest
-
-
-
-
-
-
-
(1,285
)
-
(1,285
)
Exchange of noncontrolling interest
-
-
2,768,199
-
55,178
-
-
(55,178
)
-
-
Payments related to tax withholding for stock-based compensation
-
-
-
-
(4,100
)
-
-
-
-
(4,100
)
Stock-based compensation
-
-
674,140
-
13,847
-
-
-
-
13,847
Issuance of common stock - employee stock purchase plan
-
-
74,950
-
-
-
-
-
Balance at December 31, 2021
-
$
-
234,779,247
$
$
1,214,830
$
(9,164
)
$
(3,333,481
)
$
13,893
$
$
(2,113,774
)
The accompanying notes are an integral part of these consolidated financial statements.
Uniti Group Inc.
Consolidated Statements of Cash Flows
Year Ended December 31,
(Thousands)
Cash flow from operating activities
Net income (loss)
$
124,745
$
(718,812
)
$
10,908
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization
290,942
329,403
405,754
Amortization of deferred financing costs and debt discount
18,122
36,955
42,779
Loss on debt extinguishment
49,280
73,952
-
Interest rate swap termination
11,317
10,155
-
Deferred income taxes
(6,467
)
(13,891
)
(11,428
)
Equity in earnings of unconsolidated entities
(2,102
)
(98
)
-
Distributions of cumulative earnings from unconsolidated entities
3,922
1,960
-
Cash paid for interest rate swap settlement
(12,483
)
(7,818
)
-
Straight-line rental revenues
(41,239
)
(6,872
)
(208
)
Stock-based compensation
13,847
13,721
10,808
Change in fair value of contingent consideration
7,163
(28,463
)
Goodwill impairment (Note 3)
-
71,000
-
Gain on prepayment of settlement payable (Note 16)
(5,432
)
-
-
Gain on sale of real estate
(442
)
(86,267
)
(28,995
)
(Gain) loss on sale of operations
(28,143
)
-
2,242
(Gain) loss on asset disposals
(213
)
1,796
6,891
Accretion of settlement payable
16,901
-
-
Other
(297
)
(435
)
Changes in assets and liabilities, net of acquisitions:
Accounts receivable
24,497
12,634
25,592
Other assets
14,161
(24,141
)
10,297
Accounts payable, accrued expenses and other liabilities
27,799
37,850
(3,260
)
Deferred revenue from prepaid rent - Bluebird transaction (Note 6)
-
-
174,500
Settlement payable (Note 16)
-
418,840
-
Net cash provided by operating activities
499,157
157,233
616,982
Cash flow from investing activities
Acquisition of businesses, net of cash acquired
-
-
(10,312
)
Asset acquisitions (Note 6)
-
(73,407
)
(320,818
)
Proceeds from sale of operations (Note 6)
62,113
-
6,400
Proceeds from sale of other equipment
1,487
-
-
Proceeds from sale of real estate, net of cash
1,034
391,885
130,429
Other capital expenditures
(385,855
)
(317,084
)
(350,480
)
Net cash (used in) provided by investing activities
(321,221
)
1,394
(544,781
)
Cash flow from financing activities
Repayment of debt
(2,260,000
)
(2,044,728
)
-
Proceeds from issuance of Notes
2,380,000
2,250,000
345,000
Principal payment on debt
-
-
(21,080
)
Dividends paid
(141,371
)
(135,676
)
(138,731
)
Payments of settlement payable
(190,924
)
-
-
Payments of contingent consideration
(2,979
)
(15,713
)
(32,253
)
Borrowings under revolving credit facility
310,000
170,000
139,000
Payments under revolving credit facility
(220,000
)
(635,019
)
(203,981
)
Finance lease payments
(2,019
)
(3,702
)
(4,257
)
Payments for financing costs
(27,660
)
(50,875
)
(49,497
)
Settlement Common Stock issuance (Note 20)
-
244,550
-
Costs related to early repayment of debt
(36,486
)
-
-
Common stock issuance, net of costs
-
-
21,641
Proceeds from sale of warrants
-
-
50,819
Payment for bond hedge option
-
-
(70,035
)
Distributions paid to noncontrolling interest
(1,700
)
(2,322
)
(3,046
)
Employee stock purchase plan
Payments related to tax withholding for stock-based compensation
(4,100
)
(1,097
)
(1,834
)
Net cash (used in) provided by financing activities
(196,567
)
(223,906
)
32,629
Effect of exchange rates on cash and cash equivalents
-
-
(43
)
Net (decrease) increase in cash and cash equivalents
(18,631
)
(65,279
)
104,787
Cash and cash equivalents at beginning of period
77,534
142,813
38,026
Cash and cash equivalents at end of period
$
58,903
$
77,534
$
142,813
Non-cash investing and financing activities:
Property and equipment acquired but not yet paid
$
15,395
$
15,230
$
17,032
Tenant capital improvements
$
139,012
$
102,396
$
164,742
Receipt of equity method investment value in exchange for assets
$
-
$
67,904
$
-
Settlement of contingent consideration through non-cash consideration
$
-
$
-
$
11,178
The accompanying notes are an integral part of these consolidated financial statements.
Uniti Group Inc.
Notes to the Consolidated Financial Statements
Note 1. Organization and Description of Business
Uniti Group Inc. (the “Company,” “Uniti,” “we,” “us,” or “our”) was incorporated in the state of Maryland on September 4, 2014. We are an independent, internally managed real estate investment trust (“REIT”) engaged in the acquisition, construction and leasing of mission critical infrastructure in the communications industry. We are principally focused on acquiring and constructing fiber optic, copper and coaxial broadband networks and data centers. We have historically managed our operations in four separate lines of business: Uniti Fiber, Uniti Towers, Uniti Leasing, and the Consumer CLEC Business. On June 1, 2020, the Company completed the sale of its Uniti Towers business, and as of the end of the second quarter of 2020, the Company had substantially completed the wind down of its Consumer CLEC business. As a result, effective January 1, 2021, we manage our operations focused on our two primary lines of business: Uniti Fiber and Uniti Leasing.
The Company operates through a customary “up-REIT” structure, pursuant to which we hold substantially all of our assets through a partnership, Uniti Group LP, a Delaware limited partnership (the “Operating Partnership”), that we control as general partner, 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 (“Talk America”), which we substantially completed the wind down of the business as of the end of the second quarter of 2020. The up-REIT structure is intended to facilitate future acquisition opportunities by providing the Company with the ability to use common units of the Operating Partnership as a tax-efficient acquisition currency. As of December 31, 2021, we are the sole general partner of the Operating Partnership and own approximately 99.7% of the partnership interests in the Operating Partnership.
Note 2. Basis of Presentation and Consolidation
The accompanying Consolidated Financial Statements include all accounts of the Company and, its wholly-owned and/or controlled subsidiaries, including the Operating Partnership. Under the Accounting Standards Codification 810, Consolidation (“ASC 810”), the Operating Partnership is considered a variable interest entity and is consolidated in the Consolidated Financial Statements of Uniti Group Inc. because the Company is the primary beneficiary. All material intercompany balances and transactions have been eliminated.
ASC 810 provides guidance on the identification of entities for which control is achieved through means other than voting rights (“variable interest entities” or “VIEs”) and the determination of which business enterprise, if any, should consolidate the VIEs. Generally, the consideration of whether an entity is a VIE applies when either: (1) the equity investors (if any) lack (i) the ability to make decisions about the entity’s activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; (2) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support; or (3) the equity investors have voting rights that are not proportionate to their economic interests and substantially all of the activities of the entity involve or are conducted on behalf of an investor with a disproportionately small voting interest. The Company consolidates VIEs in which it is considered to be the primary beneficiary. The primary beneficiary is defined as the entity having both of the following characteristics: (1) the power to direct the activities that, when taken together, most significantly impact the VIE’s performance; and (2) the obligation to absorb losses and right to receive the returns from the VIE that would be significant to the VIE.
The accompanying Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for 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”).
Note 3. Summary of Significant Accounting Policies
Use of Estimates-The preparation of financial statements, in accordance with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. The estimates and assumptions used in the accompanying financial statements are based upon management’s evaluation of the relevant facts and circumstances as of the date of the financial statements. Actual results may differ from the estimates and assumptions used in preparing the accompanying financial statements, and such differences could be material.
Property, Plant and Equipment-Property, plant and equipment is stated at original cost, net of accumulated depreciation. The Company capitalizes costs incurred in bringing property, plant and equipment to an operational state, including all activities directly associated with the acquisition, construction, and installation of the related assets it owns. The Company capitalizes a portion of the interest costs it incurs for assets that require a period of time to get them ready for their intended use. The amount of interest that is capitalized is based on the average accumulated expenditures made during the period involved in bringing the assets comprising a network to an operational state at the Company’s weighted average interest rate during the respective accounting period.
The Company also enters into leasing arrangements providing for the long-term use of constructed fiber that is then integrated into the Company’s network infrastructure. For each lease that qualifies as a finance lease, the present value of the lease payments, which may include both periodic lease payments over the term of the lease as well as upfront payments to the lessor, is capitalized at the inception of the lease and included in property and equipment. As of December 31, 2021 and 2020, the accumulated amortization of our finance lease assets was $18.4 million and $16.8 million, respectively.
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”) to Uniti. Certain property, plant and equipment acquired as part of our Spin-Off is depreciated using a group composite depreciation method. Under this method, when property is retired, the original cost, net of salvage value, is charged against accumulated depreciation and no immediate gain or loss is recognized on the disposition of the property. For all other property, which includes amortization of finance lease assets, depreciation is computed using the straight-line method over the estimated useful life of the respective property. When the property is retired or otherwise disposed of, the related cost and accumulated depreciation are written-off, with the corresponding gain or loss reflected in operating results. Construction in progress includes direct materials and labor related to fixed assets during the construction period. Depreciation begins once the construction period has ceased and the related asset is placed into service, and the asset will be depreciated over its useful life.
Costs of maintenance and repairs to property, plant and equipment subject to triple-net leasing arrangements are the responsibility of our tenant. Costs of maintenance and repairs to property, plant and equipment not subject to triple-net leasing arrangements are expensed as incurred.
Tenant Capital Improvements-Our leases with Windstream provide that tenant funded capital improvements (“TCIs”), defined as maintenance, repair, overbuild, upgrade or replacements to the leased network, 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 the 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. At December 31, 2021 and 2020, the net book value of TCIs recorded as a component of property, plant and equipment on our Consolidated Balance Sheet was $838.8 million and $767.2 million, respectively. For the years ended December 31, 2021, 2020 and 2019, we recognized $39.0 million, $35.1 million, and $29.0 million of revenue and depreciation expense related to TCIs, respectively.
Impairment of Long-Lived Assets-We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset group may not be recoverable from future undiscounted net cash flows we expect the asset group to generate. If the asset group is not fully recoverable, an impairment loss would be recognized for the difference between the carrying value of the asset group and its estimated fair value based on discounted net future cash flows. Assets held for sale, if any, are reported at the lower of the carrying amount or fair value less cost to sell. During the years ended December 31, 2021, 2020 and 2019, there were no events or changes in circumstances indicating that the carrying amount of any of our assets groups to not be recoverable from future undiscounted net cash flows we expect the asset groups to generate, and no impairment losses were recognized.
Asset Retirement Obligations-The Company records obligations to perform asset retirement activities, primarily including requirements to remove equipment from leased space or customer sites as required under the terms of the related lease and customer agreements. The fair value of the liability for asset retirement obligations, which represents the net present value of the estimated expected future cash outlay, is recognized in the period in which it is incurred and the fair value of the liability can reasonably be estimated. The liability accretes as a result of the passage of time and related accretion expense is recognized in the Consolidated Statements of Income (Loss). The associated asset retirement costs are capitalized as an additional carrying amount of the related long-lived asset and depreciated on a straight-line basis over the asset’s useful life. As of December 31, 2021 and 2020, our aggregate carrying amount of asset retirement obligations totaled $11.8 million and $10.7 million, respectively. During the years ended December 31, 2021 and 2020, we incurred liabilities of $0.4 million and $0.2 million related to asset retirement obligations, respectively. During the years ended December 31, 2021, 2020, and 2019, we recognized $1.5 million, $1.3 million, and $1.3 million of accretion expense related to asset retirement obligations, respectively.
Cash and Cash Equivalents-Cash and cash equivalents include all non-restricted cash held at financial institutions and other non-restricted highly liquid short-term investments with original maturities of three months or less.
Derivative Instruments and Hedging Activities-We account for our derivatives in accordance with FASB ASC 815, Derivatives and Hedging, in which we reflect all derivative instruments at fair value as either assets or liabilities on our Consolidated Balance Sheet. For derivative instruments that are designated and qualify as hedging instruments, we record the effective portion of the gain or loss on the hedged instruments as a component of accumulated other comprehensive income or loss. Any ineffective portion of a derivative’s change in fair value is immediately recognized within net income. For derivatives that do not meet the criteria for hedge accounting, changes in fair value are immediately recognized within net income. See Note 8 and Note 10.
Exchangeable Notes and Related Transactions-On June 28, 2019, Uniti Fiber Holdings Inc., 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 Holdings Inc.’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 Holdings Inc.’s non-convertible debt borrowing rate. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated conversion feature. See Note 12. As discussed in “Recently Adopted Accounting Pronouncements” in this Note 3, the Company adopted ASU No. 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470- 20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”) on January 1, 2021. The adoption of ASU 2020-06 resulted in the re-combination of the liability and equity components of these notes into a single liability instrument.
In connection with the offering of the Exchangeable Notes, Uniti Fiber Holdings Inc. 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 12) 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 Transactions are not accounted for as derivatives that must be remeasured each reporting period and instead, are recorded in stockholders’ deficit. See Note 10.
Intangible Assets-Intangible assets are presented in the financial statements at cost less accumulated amortization and are amortized using the straight-line method over their estimated useful lives.
Foreign Currency Translation-The financial statements of our international subsidiaries whose functional currency is the local currency, and includes the Mexican Peso and Colombian Peso, are translated into U.S. dollars using the exchange rate at the balance sheet date for assets and liabilities and the weighted average exchange rate for the applicable period for revenues, expenses, gains and losses. Translation adjustments are recorded as a separate component of comprehensive income in stockholders’ deficit. On April 2, 2019, the Company ceased transactions involving foreign currencies with the completed sale of the Uniti Towers’ Latin America business (see Note 6), which included our international subsidiaries.
Transaction Related and Other Costs-The Company expenses non-capitalizable transaction related and other costs in the period in which they are incurred and services are received. Transaction related costs include incremental acquisition pursuit, transaction and integration costs, including unsuccessful acquisition pursuit costs. Pursuit and transaction costs include professional services (legal, accounting, advisory, regulatory, etc.), finder’s fees, travel expenses, and other direct expenses associated with a business 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 16), and costs associated with the implementation of our new enterprise resource planning system are included within this line item on the Consolidated Statements of Income (Loss).
Settlement Expense-As described in Note 16, on July 25, 2019, in connection with Windstream’s bankruptcy, Windstream Holdings and Windstream Services filed a complaint with the U.S. Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) in an adversary proceeding against Uniti and certain of its affiliates. On March 2, 2020, Uniti and Windstream jointly announced that they agreed to the Settlement (as defined in Note 16) to resolve any and all claims and causes of action that have been or may be asserted against Uniti by Windstream, including all litigation brought by Windstream and certain of its creditors in the context of Windstream’s bankruptcy, and on May 12, 2020, the Bankruptcy Court entered an order approving Windstream’s assumption of the Master Lease as part of the Settlement. As a result, during the second quarter of 2020, we estimated that $650.0 million of the consideration paid to Windstream should be classified as settlement of litigation, and therefore, recorded a $650.0 million charge. The charge represented our estimated fair value of the litigation settlement component of the Settlement. See Note 16.
Debt Issuance Costs-The Company recognizes debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts. The costs, which include underwriting, legal, and other direct costs related to the issuance of debt, are amortized over the contractual term of the debt using the effective interest method.
Revenue Recognition- The following is a description of principal activities, separated by reportable segments (see Note 15), from which the Company generates its revenues. We exclude from the transaction price any amounts collected from customers for sales taxes and therefore, they are not included in revenue.
Leasing
Leasing revenue represents the results from our leasing program, 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. See discussion in “Leases” in this Note 3 and Note 5.
In connection with the Spin-Off, we entered into a long-term exclusive triple-net lease (the “Master Lease”) with Windstream, whereby Windstream is responsible for the costs related to operating the Distribution Systems, including property taxes, insurance and maintenance and repair costs. 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. See Note 5. As a result, we do not record an obligation related to the payment of property taxes or insurance, as Windstream makes direct payments to the taxing authorities and insurance carriers, respectively.
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 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 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.
iii.
Small cell contracts provide improved network connection to areas that may not require or accommodate a tower. Small cell arrangements typically contain five streams of revenue: site development, radio frequency (“RF”) design, dark fiber lease, construction services, and maintenance services. Site development, RF design and construction are each separate services and are considered distinct performance obligations. Dark fiber and associated maintenance services constitute a lease, and as such, revenue is recognized under the leasing 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 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 and revenue is recognized under the leasing guidance. When (i) a customer makes an advance payment or (ii) a customer is contractually obligated to pay any amounts in advance, which is not deemed a separate performance obligation, deferred leasing revenue is recorded. This leasing revenue is recognized ratably over the expected term of the contract, unless the pattern of service suggests otherwise.
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 former towers business, Uniti Towers, through which we acquired and constructed tower and tower-related real estate, which we then leased to our customers in the United
States and Latin America. Revenue from our towers business qualifies as a lease under ASC 842 and is outside the scope of ASC 606. The Company completed a series of transactions to largely divest of its towers business and on April 2, 2019, May 23, 2019 and June 1,2020, the Company completed the sales of its Latin American business, substantially all of its U.S. ground lease business, and its U.S. tower business, respectively.
Consumer CLEC
The Consumer CLEC segment represents the operations of Talk America Services (“Talk America”), which provided local telephone, high-speed internet and long-distance services to customers in the eastern and central United States. Customers were 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. As of the end of the second quarter of 2020, we substantially completed a wind down of our Consumer CLEC business.
Commissions - Under Topic 606 and Topic 340, Other Assets and Deferred Costs, we capitalize commission fees as costs of obtaining a contract when those commissions are incremental and expected to be recovered from the revenue contract and we amortize those capitalized costs consistent with the pattern of transfer of the product or service to which the capitalized costs relate. The amortization of these costs are included in general and administrative expense on the Consolidated Statements of Income (Loss).
We are exposed to credit losses primarily through our trade receivables. We assess ability to pay for certain customers by considering a variety of factors, such as the customer’s established credit rating, if available, and our assessment of creditworthiness. We determine the allowance for credit losses on accounts receivable using a combination of specific reserves for accounts that are deemed to exhibit credit loss indicators and general reserves that are determined using loss rates based on historical experience and economic expectations. We update our estimate of credit loss reserves quarterly, considering recent write-offs, collections information and underlying economic expectations. The allowance for credit losses is recorded in accounts receivable, net on our Consolidated Balance Sheets. At December 31, 2021 and 2020, our allowance for credit losses was $2.7 million and $2.9 million, respectively. Credit losses for the years ended December 31, 2021, 2020 and 2019 were $1.5 million, $1.8 million and $1.6 million, respectively.
Straight-Line Revenue Receivable-We have evaluated the collectability of our straight-line revenue receivables in accordance with the provisions of ASC 842. The adoption of ASC 842 on January 1, 2019 superseded prior guidance regarding the evaluation of collectability of lease receivables, including straight-line revenue receivables. 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 it was not probable that we would collect all future payments due to the Company over the initial term of the Master Lease. As a result, we reflected the write off of the straight-line revenue balance as of January 1, 2019 as a $61.5 million adjustment to equity resulting from the change in accounting standard. Upon Windstream’s emergence from bankruptcy in September 2020, we re-evaluated the collectability of the Windstream Leases (as described in Note 5), determining that it was probable that we would collect all future payments due to the company over the initial term of the Windstream Leases; therefore, we account for the Windstream Leases on a straight-line basis.
Leases-Effective January 1, 2019, we account for leases in accordance with ASC 842. The standard requires lessees to apply a dual approach, classify 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-line basis over the term of the lease, respectively. A lessee is also required to record an 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, with exception of how collectability of future lease payments is evaluated and the impact on revenue recognition.
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.
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. Operating leases where we are the lessor are included in Leasing, Fiber Infrastructure and Tower revenues on our Consolidated Statements of Income (Loss).
From time to time we may 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 asset at the date of lease inception.
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 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 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.
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 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 not probable, the lessee is placed on non-accrual status and Leasing revenue is recognized when cash payments are received.
Where we are the lessee, the ROU asset is initially measured at 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 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 Consolidated Statements of Income (Loss) 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 general and administrative and operating expense in our Consolidated Statements of Income (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, the practical expedient in 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 2019-11, 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 2019-01, Land Easement Practical Expedient for 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 ASC 842 and that were not previously accounted for as leases under ASC 840, Leases (“ASC 840”).
In connection with the adoption of ASC 842, we have recorded an adjustment to equity of $63.2 million, net of tax for the cumulative effect from a change in accounting standard. Of this amount, $61.5 million related to the write-off of the Master Lease straight-line revenue receivable, and $1.7 million relates to the establishment of the ROU assets and lease liabilities.
Stock-Based Compensation-We account for stock-based compensation using the fair value method of accounting. We have determined that our stock-based payment awards granted in exchange for employee services qualify as
equity classified awards, which are measured based on the fair value of the award on the date of the grant. The fair value of restricted stock-based payments is based on the market value of our common stock on the date of grant. The fair value of performance-based awards, which have performance conditions, is based on a Monte Carlo simulation. The fair value of all stock-based compensation is recognized over the period during which an employee is required to provide services in exchange for the award. See Note 13.
Income Taxes-We elected on our initial U.S. federal income tax return to be treated as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”). To qualify as a REIT, we must distribute at least 90% of our annual REIT taxable income, determined without regard to the dividends paid deduction and excluding any capital gains, to shareholders, and meet certain organizational and operational requirements, including asset holding requirements. As a REIT, we will generally not be subject to U.S. federal income tax on income that we distribute as dividends to our shareholders. If we fail to qualify as a REIT in any taxable year, we will be subject to U.S. federal income tax, including any applicable alternative minimum tax for open taxable years through 2017, on our taxable income at regular corporate income tax rates, and we could not deduct dividends paid to our shareholders in computing taxable income. Any resulting corporate liability could be substantial and could materially and adversely affect our net income and net cash available for distribution to shareholders. Unless we were entitled to relief under certain Code provisions, we also would be disqualified from reelecting to be taxed as a REIT for the four taxable years following the year in which we failed to qualify as a REIT.
Subject to the restrictions imposed by our 7.875% senior secured notes due 2025 (see Note 12), our ability to make cash distributions to our shareholders in amounts exceeding 90% of our good faith estimate, as of the date on which the first quarterly dividend for the relevant year is declared, of our REIT taxable income for such year, determined without regard to the dividends paid deduction and excluding any capital gains, until we reduce our net leverage ratio. As a result, we may be required to record a provision in our Consolidated Financial Statements for U.S. federal income taxes related to the activities of the REIT and its passthrough subsidiaries for any undistributed income. We are subject to the statutory requirements of the locations in which we conduct business, and state and local income taxes are accrued as deemed required in the best judgment of management based on analysis and interpretation of respective tax laws.
We have elected to treat the subsidiaries through which we operate Uniti Fiber and 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.
Deferred tax assets and liabilities are recognized under the asset and liability method for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax balances are adjusted to reflect tax rates based on currently enacted tax laws, which will be in effect in the years in which the temporary differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period of the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that such assets will be realized.
The Company is subject to restrictions on distributions to its shareholders based on our 7.875% senior secured notes due 2025. The restrictions permit the Company to make the minimum required distribution to maintain its status as a REIT, which is limited to 90% of our REIT taxable income, as estimated in good faith as of the date on which the first quarterly dividend for the relevant tax year is declared. The restrictions will remain in place until the Company’s net leverage ratio (as defined) is below 5.75 : 1.00.
We recognize the benefit of tax positions that are "more likely than not" to be sustained upon examination based on their technical merit. The benefit of a tax position is measured at the largest amount that has a greater than 50 percent likelihood of being realized upon ultimate settlement. If applicable, we will report tax-related penalties and interest expense as a component of income tax expense. We currently have unrecognized tax benefits of $1.7 million recorded in deferred income taxes on our Consolidated Balance Sheet.
The Company may be subject to state corporate level tax in a certain limited number of states on any built-in gain recognized from a sale of assets occurring within a ten-year recognition period after the Spin-Off. The five-year
recognition period applicable for federal corporate level tax on any built-in gain recognized from a sale of assets occurring within five years after the Spin-Off expired in 2020.
Business Combinations and Asset Acquisitions-In accordance with ASC 805, Business Combinations, we apply the acquisition method of accounting for acquisitions meeting the definition of a business combination or asset acquisition, where assets acquired and liabilities assumed are recorded at fair value at the date of each acquisition, and the results of operations are included with those of the Company from the dates of the respective acquisitions. The fair value of the acquired assets and liabilities are estimated using the income, market and/or cost approach. The income approach utilizes the present value of estimated future cash flows that a business or asset can be expected to generate, while under the market approach, the fair value of an asset or business reflects the price at which comparable assets are purchased under similar circumstances. Inherent in our preparation of cash flow projections are significant assumptions and estimates derived from a review of operating results, business plans, expected growth rates, capital expenditure plans, cost of capital and tax rates. We also make certain forecasts about future economic conditions, interest rates and other market data. Many of the factors used in assessing fair value are outside the control of management. Small changes in these assumptions or estimates could materially affect the cash flow projections, and therefore could affect the estimated fair value. Impacts of these assumptions or estimates include customer retention, execution of our business plans, which impact growth, cost escalation impacting margin, the level of capital expenditures required to sustain our growth and market factors, including interest rate and stock price fluctuations, impacting our cost of capital.
For acquisitions meeting the definition of a business combination, any excess of the purchase price paid by the Company over the amounts recognized for assets acquired and liabilities assumed is recorded as goodwill. ASC 805 also requires acquirers to, among other things, estimate the acquisition date fair value of any contingent consideration and recognize any subsequent changes in the fair value of contingent consideration in earnings. When provisional amounts are initially recorded, the Company continues to evaluate acquisitions for a period not to exceed one year after the applicable acquisition date of each transaction to determine whether any additional adjustments are needed to the allocation of the purchase price paid for the assets acquired and liabilities assumed.
For acquisitions meeting the definition of an asset acquisition, the fair value of the consideration transferred, including transaction costs, is allocated to the assets acquired and liabilities assumed based on their relative fair values. There are significant judgments and estimates used in determining the fair values of the assets acquired and liabilities assumed, which include assumptions with respect to items such as replacement cost, land value, assemblage factor, discount rate, lease-up period, implied rents per strand mile, and useful life. No goodwill is recognized in an asset acquisition.
Noncontrolling Interest-The limited partner equity interests in our operating partnership are exchangeable on a one-for-one basis for shares of our common stock or, at our election, cash of equivalent value. All of the limited partner equity interests in our operating partnership not held by the Company are reflected as noncontrolling interests. In the Consolidated Statements of Income (Loss), we allocate net income (loss) attributable to noncontrolling interests to arrive at net income (loss) attributable to shareholders based on their proportionate share.
For transactions that result in changes to the Company's ownership interest in our operating partnership, the carrying amount of noncontrolling interests is adjusted to reflect such changes. The difference between the fair value of the consideration received or paid and the amount by which the noncontrolling interest is adjusted is reflected as an adjustment to additional paid-in capital on the Consolidated Balance Sheets.
Investments in Unconsolidated Entities-We report our investments in unconsolidated entities under the equity method of accounting. We adjust our investments in unconsolidated entities for additional contributions made, distributions received as well as our share of the investees’ earnings or losses, which are reported on a 30-day lag for the investment in BB Fiber Holdings LLC (“Fiber Holdings”) and on a 90-day lag for the investment in Harmoni Towers LP (“Harmoni”), and are included in equity in earnings from unconsolidated entities in our Consolidated Statements of Income (Loss). See Note 7.
Goodwill-As of December 31, 2021, and 2020, all of our goodwill is included in our Fiber Infrastructure segment. Goodwill is recognized for the excess of purchase price over the fair value of net assets of businesses acquired. Goodwill is reviewed for impairment at least annually. In accordance with ASC 350-20, Intangibles-Goodwill and
Other, we evaluate goodwill for impairment between annual impairment tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Unless circumstances otherwise dictate, the annual impairment test is performed in the fourth quarter. Application of the goodwill impairment test requires significant judgment, including: the identification of reporting units; assignment of assets and liabilities to reporting units; assignment of goodwill to reporting units. We performed our goodwill impairment analysis during the fourth quarter, and we concluded the implied fair value of our Fiber Infrastructure reporting unit approximates its carrying value. During the years ended December 31, 2021 and 2019, no impairment losses were recognized. During the year ended December 31, 2020, we performed our goodwill impairment analysis during the fourth quarter of 2020. As a result of increased capital expenditure investments in dark fiber and small cell projects and less than anticipated cash flow growth, we concluded that the fair value of the Fiber Infrastructure reporting unit, estimated using a combination of the income approach and market approach, is less that its carrying amount. Accordingly, we recorded a $71 million goodwill impairment in the Fiber Infrastructure reporting unit.
We estimate the fair value of our reporting units (which are our segments) using a combination of an income approach based on the present value of estimated future cash flows and a market approach based on market data of comparable businesses and acquisition multiples paid in recent transactions. We evaluate the appropriateness of each valuation methodology in determining the weighting applied to each methodology in the determination of the concluded fair value. If the carrying amount of a reporting unit's net assets is less than its fair value, no impairment exists. If the carrying amount of the reporting unit is greater than the fair value of the reporting unit, an impairment loss must be recognized for the excess and recorded in the Consolidated Statements of Income (Loss) not to exceed the carrying amount of goodwill.
Inherent in our preparation of cash flow projections are significant assumptions and estimates derived from a review of our operating results and business plans, which includes expected revenue and expense growth rates, capital expenditure plans and cost of capital. In determining these assumptions, we consider our ability to execute on our plans, future economic conditions, interest rates and other market data. Many of the factors used in assessing fair value are outside the control of management, and these assumptions and estimates may change in future periods. Small changes in these assumptions or estimates could materially affect our cash flow projections, and therefore could affect the likelihood and amount of potential impairment in future periods. Potential events that could negatively impact these assumptions or estimates may include customer losses or poor execution of our business plans, which impact revenue growth, cost escalation impacting margin, the level of capital expenditures required to sustain our growth and market factors, including stock price fluctuations and increased rates, impacting our cost of capital. For example, if we were to experience a significant delay in our permitting process in the construction of our fiber networks, the timing of effected cash flows could impact long term growth rates and negatively impact the income approach, leading to potential impairment. As a result, should our expectations of average projected revenue growth percentage, average projected EBITDA margin percentage and/or average projected capital expenditures as a percentage of revenue change, we may experience future impairment to goodwill (while other assumptions remain constant). Furthermore, a deterioration in market factors such as stock prices or increased interest rates and/or declines in acquisition multiples utilized in the market approach could affect the likelihood and amount of potential impairment.
Earnings per Share-Outstanding restricted stock awards that contain rights to non-forfeitable dividends are deemed to be participating securities, requiring the application of the two-class method of computing basic and dilutive earnings per share.
Basic earnings per share includes only the weighted average number of common shares outstanding during the period. Dilutive earnings per share includes the weighted average number of common shares and the dilutive effect of restricted stock, performance-based awards outstanding during the period and the Exchangeable Notes, when such awards are dilutive. See Note 14.
Concentration of Credit Risks-Revenue under the Master Lease and the Windstream Leases provided 66.4% of our revenue for the year ended December 31, 2021, 65.8% of our revenue for the year ended December 31, 2020, and 65.0% of our revenue for the year ended December 31, 2019. Because a substantial portion of our revenue and cash flows are derived from lease payments by Windstream pursuant to the Windstream Leases, there could be a material adverse impact on our consolidated results of operations, liquidity, financial condition and/or ability to pay
dividends and service debt if Windstream were to default under the Windstream Leases or otherwise experiences operating or liquidity difficulties and becomes unable to generate sufficient cash to make payments to us.
Prior to its emergence from bankruptcy on September 21, 2020, Windstream was a publicly traded company subject to the periodic filing requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Windstream historic filings through their quarter ended June 30, 2020 can be found at www.sec.gov. On September 22, 2020, Windstream filed a Form 15 to terminate all filing obligations under Sections 12(g) and 15(d) under the Exchange Act. Windstream’s filings are not incorporated by reference in this Annual Report on Form 10-K.
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 new 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 Annual Report on Form 10-K, Windstream is current on all lease payments. We note that in August 2020, Moody’s Investor Service assigned a B3 corporate family rating with a stable outlook to Windstream in connection with its post-emergence exit financing. At the same time, S&P Global Ratings assigned Windstream a B- issuer rating with a stable outlook. These ratings were both upgrades from Windstream’s pre-bankruptcy ratings. Both ratings remain current as of the date of this filing. In order to assist us in our continuing assessment of Windstream’s creditworthiness, we periodically receive certain confidential financial information and metrics from Windstream.
Recently Adopted Accounting Pronouncements
In July 2021, the FASB issued ASU 2021-05, Leases (Topic 842): Lessors-Certain Leases with Variable Lease Payments (“ASU 2021-05”), which requires lessors to classify leases as operating leases if they (1) have variable lease payments that do not depend on a reference index or rate, and (2) would have resulted in the recognition of a selling loss at lease commencement if classified as sales-type or direct financing. ASU 2021-05 is effective for all entities which have previously adopted Topic 842 for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. The Company's variable lease payments were not material for the year ended December 31, 2021, and we do not currently maintain any direct financing or sales-type leases. The Company adopted ASU 2021-05 effective January 1, 2022, and there was no material impact on our consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06, which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity. ASU 2020-06 (1) simplifies the accounting for convertible debt instruments and convertible preferred stock by removing the existing guidance in ASC 470-20, Debt: Debt with Conversion and Other Options, that requires entities to account for beneficial conversion features and cash conversion features in equity, separately from the host convertible debt or preferred stock; (2) revises the scope exception from derivative accounting in ASC 815-40 for freestanding financial instruments and embedded features that are both indexed to the issuer’s own stock and classified in stockholders’ equity, by removing certain criteria required for equity classification; and (3) revises the guidance in ASC 260, Earnings Per Share, to require entities to calculate diluted earnings per share (“EPS”) for convertible instruments by using the if-converted method. In addition, entities must presume share settlement for purposes of calculating diluted EPS when an instrument may be settled in cash or shares. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years, with early adoption permitted. The Company elected to early adopt ASU 2020-06 effective January 1, 2021, using the modified retrospective transition method. Pursuant to the transition guidance, the Company applied the guidance to the Exchangeable Notes that were outstanding as of January 1, 2021 with the cumulative effect recognized as an adjustment to the opening balance of retained earnings.
As a result of early adopting ASU 2020-06, the Company made certain adjustments to its accounting for the Exchangeable Notes. The adoption of ASU 2020-06 resulted in the re-combination of the liability and equity components of these notes into a single liability instrument. The carrying value as of December 31, 2020, totaled approximately $275.4 million and as a result of the adoption increased by $61.1 million to $336.5 million as of
January 1, 2021. Because of this adoption, the effective interest rate on the exchangeable senior unsecured notes went from 11.1% to 4.8%. Additional paid-in-capital was reduced by $59.9 million and deferred tax liabilities were reduced by $15.8 million. Approximately $14.6 million of cumulative effect of adoption was recognized to the opening balance of retained earnings as of January 1, 2021.
Note 4. Revenues
Disaggregation of Revenue
The following table presents our revenues disaggregated by revenue stream.
Year Ended December 31,
(Thousands)
Revenue disaggregated by revenue stream
Revenue from contracts with customers
Fiber Infrastructure
Lit backhaul
$
86,915
$
106,125
$
125,983
Enterprise and wholesale
86,390
78,702
66,545
E-Rate and government
74,396
80,428
89,430
Other
3,272
4,341
2,402
Fiber Infrastructure
$
250,973
$
269,596
$
284,360
Leasing
4,449
1,420
-
Consumer CLEC
-
10,673
Total revenue from contracts with customers
255,422
271,667
295,033
Revenue accounted for under leasing guidance
Leasing
797,048
744,495
716,640
Fiber Infrastructure
48,052
44,767
31,245
Towers
-
6,112
14,693
Total revenue accounted for under leasing guidance
845,100
795,374
762,578
Total revenue
$
1,100,522
$
1,067,041
$
1,057,611
At December 31, 2021 and 2020, lease receivables were $19.4 million and $17.5 million, respectively, and receivables from contracts with customers were $14.7 million and $45.1 million, respectively.
Contract Assets (Unbilled Revenue) and Liabilities (Deferred Revenue)
Contract assets primarily consist of unbilled construction revenue where we are utilizing our costs incurred as the measure of progress of satisfying our performance obligation. 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 years ended December 31, 2021, 2020, and 2019, we recognized revenues of $13.2 million, $5.4 million, and $4.7 million, respectively that was included in the December 31, 2020, December 31, 2019, and December 31, 2018 contract liabilities balance, respectively.
The following table provides information about contract assets and contract liabilities accounted for under Topic 606.
(Thousands)
Contract Assets
Contract Liabilities
Balance at December 31, 2020
$
3,462
$
18,601
Balance at December 31, 2021
$
4,066
$
9,099
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 to costs incremental to obtaining contracts and contract liabilities primarily relate to deferred revenue from non-recurring charges. The deferred revenue is recognized, and the liability reduced, over the contract term as the Company completes the performance obligation. As of December 31, 2021, our future revenues (i.e. transaction price related to remaining performance obligations) under contract accounted for under Topic 606 totaled $445.3 million, of which $345.3 million is related to contracts that are currently being invoiced and have an average remaining contract term of 1.8 years, while $100.0 million represents our backlog for sales bookings which have yet to be installed and have an average remaining contract term of 5.8 years. We do not disclose the value of unsatisfied performance obligations for contracts that have an original expected duration of one year or less.
Note 5. Leases
Lessor Accounting
We lease communications towers, ground, communications equipment, and dark fiber to tenants under operating leases. Our leases have initial lease terms ranging from less than one year to 35 years, most of which include options to extend or renew the leases for less than one year to 20 years (based on the satisfaction of certain conditions as defined in the lease agreements), and some of which may include options to terminate the leases within one to six months. Certain lease agreements contain provisions for future rent increases. Payments due under the lease contracts include fixed payments plus, for some of our leases, variable payments.
The components of lease income for the years ended December 31, 2021 and 2020 are as follows:
(Thousands)
Year Ended
December 31, 2021
Year Ended
December 31, 2020
Lease income - operating leases
$
845,100
$
795,374
Lease payments to be received under non-cancellable operating leases where we are the lessor for the remainder of the lease terms are as of December 31, 2021 are as follows:
(Thousands)
December 31, 2021 (1)
$
755,658
767,822
769,220
770,575
772,204
Thereafter
3,020,118
Total lease receivables
$
6,855,597
(1) Total future minimum lease payments to be received include $5.9 billion relating to the Master Lease with Windstream.
The underlying assets under operating leases where we are the lessor as of December 31, 2021 and 2020 are summarized as follows:
(Thousands)
December 31, 2021
December 31, 2020
Land
26,593
$
26,596
Building and improvements
343,624
335,495
Poles
281,130
266,758
Fiber
3,278,276
2,994,465
Equipment
Copper
3,918,281
3,850,988
Conduit
89,859
89,773
Tower assets
1,397
1,397
Finance lease assets(1)
28,126
32,660
Other assets
10,649
10,425
7,978,363
7,608,978
Less: accumulated depreciation
(5,391,479
)
(5,222,731
)
Underlying assets under operating leases, net
$
2,586,884
$
2,386,247
(1) December 31, 2020 balance includes $4.5 million assets under operating leases sold on May 28, 2021. See Note 6.
Depreciation expense for the underlying assets under operating leases where we are the lessor for the years ended December 31, 2021 and 2020 is summarized as follows:
(Thousands)
Year Ended
December 31, 2021
Year Ended
December 31, 2020
Depreciation expense for underlying assets under operating leases
$
178,348
$
209,946
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 include options to extend or renew the leases for less than one year to 20 years, and some of which may include options to terminate the leases within one to six months. Certain lease agreements contain provisions for future rent increases. Payments due under the lease contracts include fixed payments plus, for some of our leases, variable payments.
As of December 31, 2021, we have short term lease commitments amounting to approximately $2.6 million, for colocation and dark fiber arrangements.
The components of lease cost are presented within general and administrative expense and operating expense, while sublease income is presented within revenues in our Consolidated Statements of Income (Loss) for the years ended December 31, 2021 and 2020 are as follows:
(Thousands)
Year Ended
December 31, 2021
Year Ended
December 31, 2020
Finance lease cost
Amortization of ROU assets
$
4,649
$
3,702
Interest on lease liabilities
2,383
3,807
Total finance lease cost
7,032
7,509
Operating lease cost
18,886
24,080
Short-term lease cost
2,885
2,029
Variable lease cost
Less sublease income
(12,752
)
(12,273
)
Total lease cost
$
16,543
$
22,024
Amounts reported in the Consolidated Balance Sheets for leases where we are the lessee as of December 31, 2021 and 2020 were as follows:
(Thousands)
Location on Consolidated Balance Sheets
December 31, 2021
December 31, 2020
Operating leases
ROU asset, net(1)
Other assets, net
$
80,271
$
97,850
ROU liability(2)
Accounts payable, accrued expenses and other liabilities, net
57,349
71,483
Finance leases
ROU asset, gross(3)
Property, plant and equipment, net
$
72,284
$
128,098
ROU liability(4)
Finance lease obligations
15,348
48,724
Weighted-average remaining lease term
Operating leases
9.4 years
12.2 years
Finance leases
12.8 years
13.3 years
Weighted-average discount rate
Operating leases
8.6
%
9.9
%
Finance leases
10.6
%
8.0
%
(1) December 31, 2020 balance includes $20.7 million ROU assets sold on May 28, 2021. See Note 6.
(2) December 31, 2020 balance includes $17.6 million lease liabilities sold on May 28, 2021. See Note 6.
(3) December 31, 2020 balance includes $54.0 million finance lease assets sold on May 28, 2021. See Note 6.
(4) December 31, 2020 balance includes $33.3 million finance lease obligations sold on May 28, 2021. See Note 6.
Other information related to leases as of December 31, 2021 and 2020 are as follows:
(Thousands)
Year Ended
December 31, 2021
Year Ended
December 31, 2020
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows for finance leases
$
2,383
$
3,807
Operating cash flows for operating leases
22,471
28,485
Financing cash flows for finance leases
2,019
3,702
Non-cash items:
New operating leases and remeasurements, net
$
15,230
$
2,681
New finance leases
-
Future lease payments under non-cancellable leases as of December 31, 2021 are as follows:
(Thousands)
Operating Leases
Finance Leases
$
14,348
$
2,329
12,381
2,285
10,087
2,083
7,504
2,021
4,918
2,021
Thereafter
36,283
14,702
Total undiscounted lease payments
$
85,521
$
25,441
Less: imputed interest
(28,172
)
(10,093
)
Total lease liabilities
$
57,349
$
15,348
Future sublease rentals as of December 31, 2021 are as follows:
(Thousands)
Sublease Rentals
$
9,542
9,558
9,661
9,748
9,833
Thereafter
133,585
Total
$
181,927
Windstream Leases
On September 18, 2020, in connection with Windstream’s emergence from bankruptcy and the implementation of the Settlement with Windstream described in Note 16 below, Uniti and Windstream bifurcated the Master Lease and entered into two structurally similar master leases that each expire on April 30, 2030 (collectively, the “Windstream Leases”), which Windstream Leases amended and restated the Master Lease in its entirety. The Windstream Leases consist of two leases: (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 competitive local exchange carrier (“CLEC”) operations. The aggregate initial annual rent under the Windstream Leases is equal to the annual rent under the Master Lease previously in effect. The tenants under the ILEC MLA are Windstream Holdings II, LLC (“Windstream Holdings II,” successor in interest to Windstream Holdings, Inc.), Windstream Services II, LLC (“Windstream Services II,” successor in interest to Windstream Services LLC), and certain subsidiaries and/or newly formed affiliated entities operating the ILECs, and the landlords under the ILEC MLA are the Uniti entities that own the applicable ILEC assets. Similarly, the tenants under the CLEC MLA are Windstream Holdings II, Windstream Services II, and certain subsidiaries and/or newly formed affiliated entities operating CLECs, and the landlords under the CLEC MLA are the Uniti entities that own the CLEC assets. The Windstream Leases contain cross-guarantees and cross-default provisions, which will remain effective as long as Windstream or an affiliate is the tenant under both of the Windstream Leases and unless and until the landlords under the ILEC MLA are different from the landlords under the CLEC MLA. The Windstream Leases permit Uniti to transfer its rights and obligations and otherwise monetize or encumber the Windstream Leases, together or separately, so long as Uniti does not transfer interests in either Windstream Lease to a Windstream competitor.
In addition, the Windstream Leases impose certain financial restrictions on Windstream if Windstream fails to maintain certain financial covenants. Windstream covenants not to incur certain indebtedness (other than certain refinancing in a principal amount that does not exceed the sum of the principal amount of the indebtedness refinanced, the accrued and unpaid interest on such indebtedness refinanced and any other amounts owing thereon and any customary costs incurred in connection with such refinancing or drawings under its third party syndicated revolving credit facility, in an amount not to exceed $750 million) if its total leverage ratio, pro forma for the incurrence of such indebtedness, would exceed 3.00:1:00. Further, Windstream covenants not to incur certain additional indebtedness, pay dividends, repurchase stock or prepay unsecured debt, or enter into a transaction with an entity controlled by a member of the board without Uniti’s consent if Windstream’s total leverage ratio exceeds 3.50:1.00. Notwithstanding the foregoing, the financial covenants described herein shall not apply at any time in which Windstream maintains a corporate family rating of not less than “B2” by Moody’s and either “B” by Standard & Poor’s or “B” by Fitch Ratings.
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”). 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 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 are limited to $225 million per year in 2021 through 2024; $175 million per year in 2025 and 2026; and $125 million per year in 2027 through 2029.
If the cost incurred by Windstream (or the successor tenant under a Windstream Lease) for Growth Capital Improvements in any calendar year exceeds the annual limit for such calendar year, Windstream (or such tenant, as the case may be) may submit such excess costs for reimbursement in any subsequent year and such excess costs shall be funded from the annual commitment amounts in such subsequent period. In addition, to the extent that reimbursements for Growth Capital Improvements funded in any calendar year during the term is less than the annual limit for such calendar year, the unfunded amount in any calendar year will carry-over and may be added to the annual limits for subsequent calendar years, subject to an annual limit of $250 million in any calendar year, except that, during calendar year 2021, Uniti’s combined total obligation to fund Growth Capital Improvements may exceed $250 million to the extent of any unfunded excess amounts from calendar year 2020. 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 payment or equipment loan funding request as and when it is required to do so under the terms of the Windstream Leases, and such failure continues for thirty (30) days, then such unreimbursed amounts may be applied as an offset against the rent owed by Windstream under the Windstream Leases (and such amounts will thereafter be treated as if Uniti had reimbursed them).
Uniti and Windstream have entered into separate ILEC and CLEC Equipment Loan and Security Agreements (collectively “Equipment Loan Agreement”) in which Uniti will provide up to $125 million (limited to $25 million in any calendar year) of the $1.75 billion of GCI commitments discussed above in the form of loans for Windstream to purchase equipment related to network upgrades or to be used in connection with the Windstream Leases. Interest on these loans will accrue at 8% from the date of the borrowing. All equipment financed through the Equipment Loan Agreement is the sole property of Windstream; however, Uniti will receive a first-lien security interest in the equipment purchased with the loans. No such loans have been made to Windstream as of December 31, 2021.
The Windstream Leases provide, and the Master Lease provided, 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 an when reimbursed by Uniti.
During the year ended December 31, 2021, Uniti reimbursed $221.5 million of Growth Capital Improvements, of which $28.5 million, as allowed for under the Settlement, represented the reimbursement of capital improvements completed in 2020 that were previously classified as TCIs. Upon reimbursement, the Company reduced the unamortized portion of deferred revenue related to these capital improvements and capitalized the difference between the cash provided to Windstream and the unamortized deferred revenue as a lease incentive. This lease incentive, which is $0.9 million and reported within other assets on our Consolidated Balance Sheet as of December 31, 2021, will be amortized against revenue over the initial term of the Windstream Leases. Subsequent to December 31, 2021, Windstream requested and we reimbursed $13.4 million of qualifying Growth Capital Improvements that were reported as TCIs as of December 31, 2021. As of the date of this Annual Report on Form 10-K, we have reimbursed a total of $319.6 million of Growth Capital Improvements.
Note 6. Business Combinations, Asset Acquisitions and Dispositions
2021 Transactions
Everstream OpCo-PropCo Transaction
On May 28, 2021, the Company completed its previously announced strategic transaction with Everstream Solutions LLC (“Everstream”). As part of the transaction, Uniti entered into two 20-year dark fiber indefeasible rights of use (“IRU”) lease agreements with Everstream on Uniti owned fiber. Concurrently, Uniti sold its Uniti Fiber Northeast operations and certain dark fiber IRU contracts acquired as part of the Windstream settlement to Everstream. Total cash consideration, including upfront IRU payments, was approximately $135 million. In addition to the upfront proceeds, Uniti will receive fees of approximately $3 million annually from Everstream over the initial 20-year term of the IRU lease agreements, subject to an annual escalator of 2%. During the quarter ended June 30, 2021, we recorded a gain of $28.1 million related to this transaction, which is included in gain on sale of operations in our Consolidated Statements of Income (Loss).
(Thousands)
Assets and liabilities sold:
Assets:
Property, plant and equipment, net
$
44,685
Goodwill
17,794
Intangible assets, net
7,264
Right of use assets, net
19,841
Total assets
$
89,584
Liabilities:
Lease liabilities
$
18,779
Intangible liabilities, net
4,492
Finance lease obligations
32,343
Total liabilities
$
55,614
Cash consideration
$
62,113
Less: total assets and liabilities sold, net
(33,970
)
Gain on sale of operations
$
28,143
2020 Transactions
Windstream Settlement Agreement
On September 18, 2020, and in furtherance of the Settlement Agreement (see Note 16), Uniti and Windstream closed an asset purchase agreement, as amended by a letter agreement (collectively, the “Asset Purchase Agreement”), pursuant to which (a) Uniti paid to Windstream approximately $284.6 million and (b) Windstream (i) granted to Uniti exclusive rights to use 1.8 million fiber strand miles leased by Windstream under the CLEC MLA, which fiber strands are either unutilized or utilized under certain dark fiber indefeasible rights of use (“IRUs”) that were simultaneously transferred to Uniti, (ii) conveyed to Uniti fiber assets (and underlying rights) consisting of 0.4 million fiber strand miles (covering 4,000 route miles) owned by Windstream, and (iii) transferred and assigned to subsidiaries of Uniti dark fiber IRUs relating to (x) the fiber strand miles granted to Uniti under the CLEC MLA (and described in clause (i)) and (y) the fiber assets (and underlying rights) for the 0.4 million fiber strand miles conveyed to Uniti (and described in clause (ii)), which IRUs generated $28.9 million of annual EBITDA in the aggregate as of the closing of the Asset Purchase Agreement. In addition, upon the transfer of the Windstream owned fiber assets (described in clause (ii) above), Uniti granted to Windstream a 20-year IRU for certain strands included in the transferred fiber assets.
The Company concluded that the Asset Purchase Agreement, and the obligation for Uniti to make cash payments to Windstream in accordance with the terms of the Settlement Agreement (see Note 16), should be combined for the accounting purpose of ASC 842. As such, total consideration provided to Windstream under the Settlement has been allocated as follows:
(Thousands)
Consideration:
Asset Purchase Agreement
$
284,550
Fair value of settlement obligation
438,577
Total consideration
$
723,127
Fair values of the assets acquired and liabilities assumed as of the acquisition date:
Property, plant and equipment
$
170,754
Intangible assets, net
69,832
Other assets
27,632
Intangible liabilities, net
(195,091
)
Total assets acquired, net
73,127
Settlement expense
650,000
Total
$
723,127
Of the $69.8 million of intangible assets acquired, $59.3 million is related to contracts (8-year weighted-average life) and $10.5 million is related to underlying rights agreements (30-year life). The Company determined the useful life of the contract intangible assets using the weighted-average remaining term and the rights of way intangible asset by aligning the useful life of the intangible with that of the underlying fiber assets acquired. The intangible liabilities represent below market leases, where we are the lessor, and has a weighted-average useful life of 19 years, which aligns with the terms of the agreements. Acquired right of use assets $27.6 million are recorded within other assets on our Consolidated Balance Sheets.
Sale of Midwest Fiber Network
On July 1, 2020, the Company completed the sale of the entity that controlled the Company’s Midwest fiber network assets (the “Propco”) to Macquarie Infrastructure Partners (“MIP”), selling net assets having a book value of $186.5 million for total cash consideration of $167.6 million. The Company retained a 20% investment interest in the Propco, having a fair value of $41.9 million, through a newly-formed limited liability company with MIP (see Note 7). During the third quarter of 2020, we recorded a gain of $23.0 million related to this transaction.
Sale of U.S. Tower Portfolio
On June 1, 2020, the Company completed the sale of its U.S. tower business to Melody, selling net assets having a book value of $190.0 million for total cash consideration of $225.8 million. The Company retained a 10% investment interest in the tower business, having a fair value of $26.0 million, through a newly-formed limited partnership with Melody (see Note 7), and will receive incremental earn-out payments, estimated to be $1.6 million, which is included in other assets on the Consolidated Balance Sheet as of December 31, 2021. During the second quarter of 2020, we recorded a gain of $63.4 million related to this transaction.
2019 Transactions
Bluebird Network, LLC
On August 30, 2019, the Company closed on its operating company/property company (“OpCo-PropCo”) transaction with 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 $320.8 million, which included transaction costs of $1.8 million. Uniti funded $175 million 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 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 “Bluebird Lease”). The Bluebird Lease is reported within the results of our Leasing segment. The Midwest operations that were sold to MIP were 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 and liabilities assumed as of the acquisition date:
(thousands)
Property, plant and equipment
$
139,566
Intangible assets
175,401
Other assets
8,946
Accounts payable, accrued expenses and other liabilities
(3,095
)
Total purchase consideration
$
320,818
Acquired right of use assets and liabilities of $8.9 million and $3.1 million are recorded within other assets, net and accounts payable, accrued expenses and other liabilities, net on our Consolidated Balance Sheets, respectively. Of the $175.4 million of intangible assets acquired, $124.7 million is related to rights of way (30 year life) and $50.7 million is related to an in-place lease (20 year life). The Company determined the useful life of the rights of way intangible asset by aligning the useful life of the intangible with that of the underlying fiber assets acquired. The in-place lease will be amortized over the initial 20-year lease term.
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 Consolidated Statements of Income (Loss). This loss included the allocation of approximately $2.2 million of goodwill. See Note 11.
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 of 2019, 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 of 2019, 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 JKM Consulting Inc. d/b/a M2 Connections (“M2”) for cash consideration of $5.5 million. M2 is a dark fiber and internet access provider 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 15. For federal income tax purposes, the transaction was treated as a taxable acquisition. Thus, all of the goodwill is expected to be deductible for tax purposes. The financial results of M2 are included in the Fiber Infrastructure segment from the date of acquisition and were not material, individually or in the aggregate, to our results of operations and therefore, pro forma financial information has not been presented.
Note 7. Investment in Unconsolidated Entities
As of December 31, 2021, the Company had an aggregate investment of $64.2 million in its equity method unconsolidated entities, which included a 42% interest in Fiber Holdings and approximately a 7% interest in Harmoni.
Fiber Holdings
Fiber Holdings was primarily established to develop fiber networks as real estate property for long-term investment. Fiber Holdings has a 47.5% ownership in the Propco that is under a long-term, triple net lease with our joint venture partner. Our ownership interest in Fiber Holdings represents approximately a 20% economic interest in the Propco. The Company’s current investment and maximum exposure to loss as a result of its involvement with Fiber Holdings was approximately $39.9 million as of December 31, 2021. The Company has not provided financial support to Fiber Holdings.
Harmoni
Harmoni was primarily established to develop wireless communication towers as real estate property for long-term investment. We concluded that Harmoni is a VIE; however, the Company determined that it was not the primary beneficiary of Harmoni because the Company lacks the power to direct the activities that most significantly impact its economic performance. The Company’s current investment and maximum exposure to loss as a result of its involvement with Harmoni was approximately $24.3 million as of December 31, 2021. The Company has not provided financial support to Harmoni.
We provide transition services to Harmoni in exchange for fees and reimbursements. Total transition service fees earned in connection with Harmoni were $0.3 million and $0.7 million for the years ended December 31, 2021 and 2020, respectively, which is included in operating expense on a net basis in our Consolidated Statements of Income (Loss).
Note 8. Fair Value of Financial Instruments
FASB ASC 820, Fair Value Measurements, establishes a hierarchy of valuation techniques based on the observability of inputs utilized in measuring assets and liabilities at fair values. This hierarchy establishes market-based or observable inputs as the preferred source of values, followed by valuation models using management assumptions in the absence of market inputs. The three levels of the hierarchy are as follows:
Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the assessment date
Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly
Level 3 - Unobservable inputs for the asset or liability
Our financial instruments consist of cash and cash equivalents, accounts and other receivables, derivative instruments, contingent consideration, our outstanding notes and other debt, and accounts, interest and dividends payable.
The following table summarizes the fair value of our financial instruments at December 31, 2021 and 2020:
(Thousands)
Total
Quoted Prices in Active Markets
(Level 1)
Prices with Other Observable Inputs
(Level 2)
Prices with Unobservable Inputs (Level 3)
At December 31, 2021
Liabilities
Senior secured notes - 7.875%, due February 15, 2025
$
2,351,576
$
-
$
2,351,576
$
-
Senior secured notes - 4.75%, due April 15, 2028
560,857
-
560,857
-
Senior unsecured notes - 6.50%, due February 15, 2029
1,087,844
-
1,087,844
-
Senior unsecured notes - 6.00%, due January 15, 2030
659,992
-
659,992
-
Exchangeable senior unsecured notes - 4.00%, due June 15, 2024
453,104
-
453,104
-
Senior secured revolving credit facility, variable rate, due December 10, 2024
199,980
-
199,980
-
Derivative liability, net
10,413
-
10,413
-
Settlement payable
254,725
-
254,725
-
Total
$
5,578,491
$
-
$
5,578,491
$
-
(Thousands)
Total
Quoted Prices in Active Markets
(Level 1)
Prices with Other Observable Inputs
(Level 2)
Prices with Unobservable Inputs (Level 3)
At December 31, 2020
Liabilities
Senior secured notes - 7.875%, due February 15, 2025
$
2,410,313
$
-
$
2,410,313
$
-
Senior secured notes - 6.00%, due April 15, 2023
561,000
-
561,000
-
Senior unsecured notes - 8.25%, due October 15, 2023
1,112,775
-
1,112,775
-
Senior unsecured notes - 7.125%, due December 15, 2024
601,500
-
601,500
-
Exchangeable senior unsecured notes - 4.00%, due June 15, 2024
426,058
-
426,058
-
Senior secured revolving credit facility, variable rate, due April 24, 2022
110,000
-
110,000
-
Derivative liability, net
22,897
-
22,897
-
Settlement payable
418,840
-
418,840
-
Contingent consideration
2,957
-
-
2,957
Total
$
5,666,340
$
-
$
5,663,383
$
2,957
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 Notes and other debt was $5.18 billion at December 31, 2021, with a fair value of $5.31 billion. The estimated fair value of the 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 instruments are carried at fair value. See Note 10. The fair value of our 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 instruments 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 December 31, 2021, the Company has 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 instruments valuation in Level 2 of the fair value hierarchy.
Given the limited trade activity of the Exchangeable Notes, the fair value of the Exchangeable Notes (see Note 12) 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.
Uniti is required to make a $490.1 million cash payment to Windstream in equal installments over 20 consecutive quarters beginning October 2020, which was the first month after Windstream’s emergence (the “Settlement Payable”) (see Note 16). The Settlement Payable was recorded at fair value, using the present value of future cash flows. The future cash flows are discounted using discount rate input based on observable market data. Accordingly, we classify inputs used as Level 2 in the fair value hierarchy. The remaining Settlement Payable is $239.4 million and is reported as settlement payable on our Consolidated Balance Sheet at December 31, 2021. There have been no changes in the valuation methodologies used since the initial recording.
We acquired Tower Cloud, Inc. (“Tower Cloud”) on August 31, 2016. As part of the Tower Cloud acquisition, we were obligated to pay contingent consideration upon achievement of certain defined operational and financial milestones from the date of acquisition through December 31, 2021. During the three months ended March 31, 2021, the Company paid $3.0 million for the achievement of the final remaining milestone in accordance with the Tower Cloud merger agreement. During the year ended December 31, 2020, we paid $15.7 million for the achievement of certain milestones in accordance with the Tower Cloud merger agreement.
Changes in the fair value of contingent consideration will be recorded in our Consolidated Statements of Income (Loss) in the period in which the change occurs. The final measurement of the contingent consideration was recorded during the three months ended March 31, 2021, resulting in an increase in the fair value of less than $0.1 million. For the year ended December 31, 2020, there was a $7.2 million increase in the fair value of the contingent consideration that was recorded in Other (income) expense on the Consolidated Statements of Income (Loss).
The following is a roll forward of our liability measured at fair value on a recurring basis using unobservable inputs (Level 3):
(Thousands)
December 31, 2020
Transfers into Level 3
(Gain)/Loss included in earnings
Settlements
December 31, 2021
Contingent consideration
$
2,957
$
-
$
$
(2,979
)
$
-
Note 9. Property, Plant and Equipment
The carrying value of property, plant and equipment is as follows:
(Thousands)
Depreciable Lives(1)
December 31, 2021
December 31, 2020
Land
Indefinite
$
28,449
$
27,945
Building and improvements
3 - 40 years
359,980
351,305
Poles
30 years
281,130
266,758
Fiber
30 years
4,107,519
3,737,372
Equipment
5 - 7 years
331,761
298,912
Copper
20 years
3,918,281
3,850,987
Conduit
30 years
89,859
89,773
Tower assets
20 years
8,544
8,571
Finance lease assets
See Note 3
72,284
74,103
Construction in progress
See Note 3
27,366
47,086
Other assets
15 - 20 years
10,652
10,553
Corporate assets
3 - 7 years
14,326
13,475
9,250,151
8,776,840
Less accumulated depreciation
(5,741,212
)
(5,503,487
)
Property, plant and equipment, net
$
3,508,939
$
3,273,353
(1) Certain property acquired from Windstream is depreciated using Windstream's estimated useful lives. Specifically, certain Fiber assets are depreciated using a 20 year life.
Finance lease assets above represent fiber leases, where we have the exclusive, unrestricted, and indefeasible right to use one, a pair, or more strands of fiber of a fiber cable.
Depreciation expense for the years ended December 31, 2021, 2020, and 2019 was $261.2 million, $301.2 million and $377.3 million, respectively.
Note 10. 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 term loan facility. These interest rate swaps were designated as cash flow hedges and have a notional value of $2.00 billion and mature on October 24, 2022. As result of the repayment of the Company’s term loan facility in February of 2020 (see Note 12), the Company entered into receive-fixed interest rate swaps to offset its existing pay-fixed interest rate swaps. As a result, the Company discontinued hedge accounting as the hedge accounting requirements were no longer met. Amounts in accumulated other comprehensive (loss) income as of the date of de-designation, will be reclassified to interest expense as the hedged transactions impact earnings. Prospectively, changes in fair value of all interest rate swaps will be recorded directly to earnings.
The Company has elected to offset derivative positions that are subject to master netting arrangements with the same counterparty in our Consolidated Balance Sheets. The gross amounts of our derivative instruments subject to master netting arrangements with the same counterparty as of December 31, 2021 were as follows:
Offsetting of Derivative Assets and Liabilities (Thousands)
Gross Amounts of
Recognized Assets or
Liabilities
Gross Amounts Offset in
the Consolidated Balance
Sheets
Net Amounts of Assets or
Liabilities presented in the
Consolidated
Balance Sheets
Assets
Interest rate swaps
$
10,788
$
(10,788
)
$
-
Total
$
10,788
$
(10,788
)
$
-
Liabilities
Interest rate swaps
$
21,201
$
(10,788
)
$
10,413
Total
$
21,201
$
(10,788
)
$
10,413
The following table summarizes the fair value and the presentation in our Consolidated Balance Sheet:
(Thousands)
Location on Consolidated
Balance Sheet
December 31, 2021
December 31, 2020
Interest rate swaps
Derivative liability, net
$
10,413
$
22,897
As of December 31, 2021, all of the interest rate swaps were valued in net unrealized loss positions and recognized as a liability balance within the derivative liability, net on the Consolidated Balance Sheets. The amount reclassified out of other comprehensive income into interest expense on our Consolidated Statements of Income (Loss) for the year ended December 31, 2021 was $11.3 million.
As of December 31, 2020, all of the interest rate swaps were valued in net unrealized loss positions and recognized as a liability balance within the derivative liability, net on the Consolidated Balance Sheets. As hedge accounting is no longer applied beginning in February 2020, the unrealized loss amounts are now being recorded directly to earnings. For the year ended December 31, 2020, the amount recorded in other comprehensive income related to the unrealized loss on derivative instruments prior to the February 2020 discontinuance of hedge accounting was $7.7 million. For the year ended December 31, 2019, the amount recorded in other comprehensive income related to the derivative instruments was $51.3 million unrealized loss. The amount reclassified out of other comprehensive income into interest expense on our Consolidated Statements of Income (Loss) for the years ended December 31,
2020 and 2019 was $10.8 million interest expense and $3.3 million interest benefit, respectively. For the year ended December 31, 2019, there was no ineffective portion of the change in fair value derivatives.
During the next twelve months, beginning January 1, 2022, we estimate that $9.2 million will be reclassified as an increase to interest expense.
Exchangeable Notes Hedge Transactions
On June 25, 2019, concurrently with the pricing of the Exchangeable Notes (see Note 12), 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 Holdings Inc., 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 Holdings Inc. is required to make in excess of the principal amount of exchanged Exchangeable Notes, as the case may be, in the event that the market value per share of the Company’s common stock, as measured under the Note Hedge Transactions, at the time of exercise is greater than the strike price of the Note Hedge Transactions.
The Note Hedge Transactions are separate transactions, entered into by Uniti Fiber Holdings Inc. with the Counterparties, and are not part of the terms of the Exchangeable Notes. Holders of the Exchangeable Notes will not have any rights with respect to the Note Hedge Transactions. Uniti Fiber Holdings Inc. 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 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 Consolidated Balance Sheets, are not accounted for as derivatives that are remeasured each reporting period.
Note 11. Goodwill and Intangible Assets
As part of the transaction with Everstream (see Note 6), we reclassified the associated assets and liabilities held for sale, including $17.8 million of goodwill and $10.7 million of intangible assets as of December 31, 2020.
Changes in the carrying amount of goodwill occurring during the year ended December 31, 2021 and 2020, are as follows:
(Thousands)
Fiber Infrastructure
Total
Goodwill at December 31, 2019
$
690,672
$
690,672
Goodwill impairment (Note 3)
(71,000
)
(71,000
)
Goodwill reclassified to held for sale
(17,794
)
(17,794
)
Goodwill at December 31, 2020
601,878
601,878
Goodwill at December 31, 2021
$
601,878
$
601,878
The carrying value of our other intangible assets is as follows:
(Thousands)
December 31, 2021
December 31, 2020
Cost
Accumulated Amortization
Cost
Accumulated Amortization
Finite life intangible assets:
Customer lists
$
416,104
$
(105,861
)
$
416,104
$
(82,989
)
Contracts
52,536
(8,209
)
48,269
(1,068
)
Underlying rights
10,497
(437
)
10,497
(87
)
Total intangible assets
$
479,137
$
474,870
Less: accumulated amortization
(114,507
)
(84,145
)
Total intangible assets, net
$
364,630
$
390,725
Finite life intangible liabilities:
Acquired below-market leases
$
191,154
$
(13,368
)
$
190,086
$
(2,200
)
Total intangible liabilities
191,154
190,086
Less: accumulated amortization
(13,368
)
(2,200
)
Total intangible liabilities, net
$
177,786
$
187,886
As of December 31, 2021, the remaining weighted average amortization period of the Company’s intangible assets was 14.9 years. Amortization expense for the years ended December 31, 2021, 2020 and 2019 was $29.8 million, $28.2 million and $27.2 million, respectively. Amortization expense is estimated to be $29.7 million in 2022, $29.8 million in 2023, $29.7. million in 2024, $29.7 million in 2025 and $29.7 million in 2026.
As part of the Asset Purchase Agreement, we recognize the amortization of below-market leases in revenue. Revenue related to the amortization of the below-market leases for the year ended December 31, 2021 was $10.7 million. We recognized no revenue from intangible liabilities for the years ended December 31, 2020, and 2019, respectively. As of December 31, 2021, the remaining weighted average amortization period of the Company’s intangible liabilities was 17.9 years. Revenue due to the amortization of the below-market leases is estimated to be $10.7 million in 2022, $10.7 million in 2023, $10.7 million in 2024, $10.7 million in 2025, and $10.7 million in 2026.
Note 12. Notes and Other Debt
All debt, including the senior secured credit facility and notes described below, are obligations of the Operating Partnership and certain of its subsidiaries as discussed below. The Company is, however, a guarantor of such debt.
Notes and other debt is as follows:
(Thousands)
December 31, 2021
December 31, 2020
Principal amount
$
5,175,000
$
4,965,000
Less unamortized discount, premium and debt issuance costs
(84,463
)
(148,476
)
Notes and other debt less unamortized discount and debt issuance costs
$
5,090,537
$
4,816,524
Notes and other debt at December 31, 2021 and 2020 consisted of the following:
December 31, 2021
December 31, 2020
(Thousands)
Principal
Unamortized Discount, Premium and Debt Issuance Costs
Principal
Unamortized Discount, Premium and Debt Issuance Costs
Senior secured notes - 6.00%, due April 15, 2023
(discount is based on imputed interest rate of 6.49%)
$
-
$
-
$
550,000
$
(4,053
)
Senior secured notes - 7.875%, due February 15, 2025
(discount is based on imputed interest rate of 8.38%)
2,250,000
(31,411
)
2,250,000
(39,852
)
Senior secured notes - 4.75%, due April 15, 2028
(discount is based on imputed interest rate of 5.04%)
570,000
(8,886
)
-
-
Senior unsecured notes - 8.25%, due October 15, 2023
(discount is based on imputed interest rate of 9.06%)
-
-
1,110,000
(22,024
)
Exchangeable senior unsecured notes - 4.00%, due June 15, 2024
(discount is based on imputed interest rate of 4.77%)
345,000
(6,187
)
345,000
(69,608
)
Senior unsecured notes - 7.125%, due December 15, 2024
(discount is based on imputed interest rate of 7.38%)
-
-
600,000
(5,316
)
Senior unsecured notes - 6.50%, due February 15, 2029
(discount is based on imputed interest rate of 6.83%)
1,110,000
(20,797
)
-
-
Senior unsecured notes - 6.00%, due January 15, 2030
(discount is based on imputed interest rate of 6.27%)
700,000
(11,689
)
-
-
Senior secured revolving credit facility, variable rate, due December 10, 2024
200,000
(5,493
)
110,000
(7,623
)
Total
$
5,175,000
$
(84,463
)
$
4,965,000
$
(148,476
)
At December 31, 2021, notes and other debt included the following: (i) $200.0 million under the Revolving Credit Facility (as defined below) pursuant to the credit agreement by and among Uniti Group LP, Uniti Group Finance 2019 Inc. and CSL Capital, LLC (hereinafter, the “Borrowers”), the guarantors and lenders party thereto and Bank of America, N.A., as administrative agent and collateral agent (the “Credit Agreement”); (ii) $2.25 billion aggregate principal amount of 7.875% Senior Secured Notes due 2025 (the “2025 Secured Notes”); (iii) $570.0 million aggregate principal amount of 4.75% Senior Secured Notes due April 15, 2028 (the “2028 Secured Notes”); (iv) $1.11 billion aggregate principal amount of 6.50% Senior Unsecured Notes due February 15, 2029 (the “2029 Notes”); (v) $345 million aggregate principal amount of 4.00% Exchangeable Senior Notes due June 15, 2024 (the “Exchangeable Notes”); and (vi) $700.0 million aggregate principal amount of 6.00% Senior Secured Notes due January 15, 2030 (the “2030 Notes” and collectively with the 2025 Secured Notes, 2028 Secured Notes, 2029 Notes and the Exchangeable Notes, the “Notes”). Until our net leverage ratio is below 5.75:1.00, our 2025 Secured Notes limit our ability to make cash distributions to our shareholders in amounts exceeding 90% of our good faith estimate, as of the date on which the first quarterly dividend for the relevant year is declared, of our REIT taxable income for such year, determined without regard to the dividends paid deduction and excluding any capital gains.
Credit Agreement
The Borrowers are party to the Credit Agreement, which after the Seventh Amendment (as defined below) as of December 31, 2021, provided for a $60.5 million non-extended revolving credit facility that matures on April 24, 2022 (the “Non-Extended Revolving Credit Facility”) and a $500 million revolving credit facility extended that, upon receipt of routine regulatory approvals, will mature on December 10, 2024 (the “Extended Revolving Credit Facility” and together with Non-Extended Revolving Credit facility, the “Revolving Credit Facility”), which provide us with the ability to obtain revolving loans as well as swingline loans and letters of credit from time to time. All obligations under the Credit Agreement are guaranteed by (i) the Company and (ii) certain of the Operating Partnership’s subsidiaries (the “Subsidiary Guarantors”) and are secured by substantially all of the assets of the Borrowers and the Subsidiary Guarantors.
The Borrowers are subject to customary covenants under the Credit Agreement, including an obligation to maintain a consolidated secured leverage ratio, as defined in the Credit Agreement, not to exceed 5.00 to 1.00. We are permitted, subject to customary conditions, to incur other indebtedness, so long as, on a pro forma basis after giving effect to any such indebtedness, our consolidated total leverage ratio, as defined in the Credit Agreement, does not exceed 6.50 to 1.00 and, if such debt is secured, our consolidated secured leverage ratio, as defined in the Credit Agreement, does not exceed 4.00 to 1.00. In addition, the Credit Agreement contains customary events of default, including a cross default provision whereby the failure of the Borrowers or certain of their subsidiaries to make payments under other debt obligations, or the occurrence of certain events affecting those other borrowing arrangements, could trigger an obligation to repay any amounts outstanding under the Credit Agreement. In particular, a repayment obligation could be triggered if (i) the Borrowers or certain of their subsidiaries fail to make a payment when due of any principal or interest on any other indebtedness aggregating $75.0 million or more, or (ii) an event occurs that causes, or would permit the holders of any other indebtedness aggregating $75.0 million or more to cause, such indebtedness to become due prior to its stated maturity. As of December 31, 2021, the Borrowers were in compliance with all of the covenants under the Credit Agreement.
A termination of either Windstream Lease would result in an “event of default” under the Credit Agreement if a replacement lease is not entered into within ninety (90) calendar days and we do not maintain pro forma compliance with a consolidated secured leverage ratio, as defined in the Credit Agreement, of 5.00 to 1.00.
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.
On February 10, 2020, 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 2019 audited financial statements. The limited waiver was issued in connection with an amendment (the “Sixth Amendment”) to our Credit Agreement.
On December 10, 2020, we entered into an amendment (the “Seventh Amendment”) to our Credit Agreement. Pursuant to the Seventh Amendment, commitments from new and existing lenders under the Revolving Credit Facility have increased to $500 million and, subject to certain conditions, the maturity date of such commitments has been extended to December 10, 2024. Certain non-extending lender commitments of $60.5 million will mature on April 24, 2022 and will continue to bear interest at rates previously in effect. Prior to the expiration of these commitments, the aggregate size of the Revolving Credit Facility will be $560.5 million from all lenders.
Borrowings under (a) the Non-Extended Revolving Credit Facility bear interest at a rate equal to either a base rate plus an applicable margin ranging from 3.75% to 4.25% or a eurodollar rate plus an applicable margin ranging from 4.75% to 5.25% and (b) effective April 17, 2021, following the receipt of certain routine regulatory approvals, the Extended Revolving Credit Facility bear interest at a rate equal to either a base rate plus an applicable margin ranging from 2.75% to 3.50% or a eurodollar rate plus an applicable margin ranging from 3.75% to 4.50%, in each
case, calculated in a customary manner and determined based on our consolidated secured leverage ratio. We are required to pay a quarterly commitment fee under the Revolving Credit Facility equal to 0.50% of the average amount of unused commitments during the applicable quarter (subject to a step-down to 0.40% per annum of the average amount of unused commitments during the applicable quarter upon achievement of a consolidated secured leverage ratio not to exceed a certain level), as well as quarterly letter of credit fees equal to the product of (A) the applicable margin with respect to eurodollar borrowings and (B) the average amount available to be drawn under outstanding letters of credit during such quarter.
The Notes
Secured Notes
The Operating Partnership, CSL Capital, LLC, Uniti Group Finance 2019 Inc. and Uniti Fiber Holdings Inc. (collectively, the “Issuers”), have outstanding $2.25 billion aggregate principal amount of the 2025 Secured Notes, which were issued on February 10, 2020. The 2025 Secured Notes mature on February 15, 2025 and bear interest at a rate of 7.875% per year. Interest on the 2025 Secured Notes is payable on February 15 and August 15 of each year.
On April 20, 2021, the Borrowers issued $570 million aggregate principal amount of the 2028 Secured Notes (together with the 2025 Secured Notes, the “Secured Notes”) and used the net proceeds from the offering to fund the redemption in full of the $550.0 million aggregate principal amount of 6.00% Senior Secured Notes due April 15, 2023 (the “2023 Secured Notes”) on May 6, 2021. During the three months ended June 30, 2021, we recognized a $4.3 million loss on the extinguishment of the 2023 Secured Notes within interest expense, net on the Condensed Consolidated Statements of Income (Loss), which included $1.3 million of non-cash interest expense for the write off of the unamortized discount and deferred financing costs and $3.0 million of cash interest expense for the redemption premium. The 2028 Secured Notes mature on April 15, 2028 and bear interest at a rate of 4.750% per year. Interest on the 2028 Secured Notes is payable on April 15 and October 15 of each year.
The Secured Notes and the related guarantees are secured by liens on substantially all of the assets of the issuers and guarantors thereto, which assets also ratably secure obligations under the senior secured credit facilities, in each case, subject to certain exceptions and permitted liens. The collateral does not include real property (below a specified threshold of value), but includes certain fixtures and other equipment as well as cash that we receive pursuant the Windstream Leases.
The indentures governing the Secured Notes contain customary high yield covenants limiting the ability of Uniti Group LP and its restricted subsidiaries to: incur or guarantee additional indebtedness; incur or guarantee secured indebtedness; pay dividends or distributions on, or redeem or repurchase, capital stock; make certain investments or other restricted payments; sell assets; enter into transactions with affiliates; merge or consolidate or sell all or substantially all of their assets; and create restrictions on the ability to pay dividends or other amounts to the Borrowers or Issuers, as applicable. These covenants are subject to a number of limitations, qualifications and exceptions. Further, until our net leverage ratio is below 5.75 : 1.00, the 2025 Secured Notes limit our ability to make cash distributions to our shareholders in amounts exceeding 90% of our good faith estimate, as of the date on which the first quarterly dividend for the relevant year is declared, of our REIT taxable income for such year, determined without regard to the dividends paid deduction and excluding any capital gains. The indentures governing the Secured Notes also contain customary events of default. As of December 31, 2021, the Company was in compliance with all of the covenants under the indentures governing the Secured Notes.
Senior Unsecured Notes
On February 2, 2021, the Borrowers issued $1.11 billion aggregate principal of the 2029 Notes and used the net proceeds to fund the tender offer and subsequent redemption of all outstanding 8.25% Senior Unsecured Notes due October 15, 2023 (the “2023 Notes”). During the year ended December 31, 2021, we recognized a $39.1 million loss on the tendered 2023 Notes within interest expense, net on the Consolidated Statements of Income (Loss), which included $21.5 million of non-cash interest expense for the write off of the unamortized discount and deferred financing costs and $17.6 million of cash interest expense for the tender premium. The 2029 Notes mature on February 15, 2029 and bear interest at a rate of 6.50% per year. Interest on the 2029 Notes is payable on February 15 and August 15 of each year.
On October 13, 2021, the Issuers issued $700.0 million aggregate principal amount of the 2030 Senior (together with the 2029 Notes, the “Senior Unsecured Notes”) and used the net proceeds to fund redemption in full of the $600.0 million 7.125% Senior Unsecured Notes due December 15, 2024 (the “2024 Notes”) on December 15, 2021. During the year ended December 31, 2021, we recognized a $5.9 million loss on the extinguishment of the 2024 Notes within interest expense, net on the Consolidated Statements of Income (Loss), which included $1.8 million of non-cash interest expense for the write off of the unamortized discount and deferred financing costs and $4.1 million of cash interest expense for the redemption premium. The Company used the remaining proceeds of $78.0 million to prepay a portion of the settlement obligations under the settlement agreement with Windstream. See Note 16. The 2030 Notes mature on January 15, 2030 and bear interest at a rate of 6.000% per year. Interest on the 2030 Notes is payable on January 15 and July 15 of each year, beginning on July 15, 2022.
The indentures governing the Senior Unsecured Notes contain customary high yield covenants limiting the ability of Uniti Group LP and its restricted subsidiaries to: incur or guarantee additional indebtedness; incur or guarantee secured indebtedness; pay dividends or distributions on, or redeem or repurchase, capital stock; make certain investments or other restricted payments; sell assets; enter into transactions with affiliates; merge or consolidate or sell all or substantially all of their assets; and create restrictions on the ability to pay dividends or other amounts to the Issuers or Borrowers, as applicable. These covenants are subject to a number of important and significant limitations, qualifications and exceptions. The indentures governing the Senior Unsecured Notes also contain customary events of default. As of December 31, 2021, the Company was in compliance with all of the covenants under the indentures governing the Senior Unsecured Notes.
The Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by the Company and by each of Uniti Group LP’s existing and future domestic restricted subsidiaries (other than the Borrowers or Issuers, as applicable) that guarantees indebtedness under the Company’s senior secured credit facilities. The guarantees are subject to release under specified circumstances, including certain circumstances in which such guarantees may be automatically released without the consent of the holders of the Notes.
The Exchangeable Notes
On June 28, 2019, Uniti Fiber Holdings Inc., 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 Holdings Inc.) 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 Holdings Inc.’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 Holdings Inc. issued the Exchangeable Notes pursuant to an indenture, dated as of June 28, 2019 (the “Indenture”), among Uniti Fiber Holdings Inc., 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 Holdings Inc.’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 Holdings Inc.’s delivery of a notice of redemption, Uniti Fiber Holdings Inc. 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 Holdings Inc. or the Company undergoes a fundamental change (as defined in the Indenture), subject to certain conditions, holders may require Uniti Fiber Holdings Inc. 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 Holdings Inc. 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 Holdings Inc. 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 Holdings Inc. 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.
On June 28, 2019, Uniti Fiber Holdings Inc., 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 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 was 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 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.
As a result of early adopting ASU 2020-06, the Company made certain adjustments to its accounting for the outstanding exchangeable senior unsecured notes. The adoption of ASU 2020-06 resulted in the re-combination of the liability and equity components of these notes into a single liability instrument. The carrying value as of December 31, 2020, totaled approximately $275.4 million and as a result of the adoption increased by $61.1 million to $336.5 million as of January 1, 2021. Because of this adoption, the effective interest rate on the exchangeable senior unsecured notes went from 11.1% to 4.8%. Additional paid-in-capital was reduced by $59.9 million and
deferred tax liabilities were reduced by $15.8 million. Approximately $14.6 million of cumulative effect of adoption was recognized to the opening balance of retained earnings as of January 1, 2021. See Note 3.
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 Consolidated Statements of Income (Loss). For the year ended December 31, 2021, 2020 and 2019, we recognized $16.5 million, $15.3 million and $16.2 million of non-cash interest expense, respectively, related to the amortization of deferred financing costs.
Aggregate annual maturities of our long-term obligations at December 31, 2021 are as follows:
(Thousands)
$
-
-
545,000
2,250,000
-
Thereafter
2,380,000
Total
$
5,175,000
Note 13. Stock-Based Compensation
The Company’s Board of Directors adopted the Uniti Group Inc. 2015 Equity Incentive Plan (the “Equity Plan”), which is administered by the Compensation Committee of the Board of Directors. Awards issuable under the Equity Plan include incentive stock options, “non-qualified” stock options, stock appreciation rights, performance units and performance shares, restricted shares, and restricted stock units.
Restricted Awards
During the year ended December 31, 2021, the Company granted 691,241 shares of restricted stock to employees, which had a fair value of $8.2 million as of the date of grant. We calculate the grant date fair value of non-vested shares of restricted stock awards using the closing sale prices on the trading day on the grant date. The restricted stock awards are amortized on a straight-line basis to expense over the vesting period, which is generally three years. As of December 31, 2021, there were 2,676,776 shares available for future issuance under the Equity Plan. The following table sets forth the number of unvested restricted stock awards and the weighted-average fair value of these awards at the date of grant:
Restricted Awards
Weighted Average Fair Value at Grant Date
Aggregate Intrinsic Value(1) ($000s)
Unvested balance December 31, 2020
1,561,415
$
12.33
Granted
691,241
$
11.82
Forfeited
(133,061
)
$
11.36
Vested
(765,622
)
$
12.95
Unvested balance, December 31, 2021
1,353,973
$
11.58
$
18,969
(1)
The aggregate intrinsic value is calculated as the market value of our common stock as of December 31, 2021. The market value as of December 31, 2021 was $14.01 per share, which was the closing price of our common stock reported for transactions effected on the NASDAQ Global Select Market on December 31, 2021, the final trading day of 2021.
During the year ended December 31, 2020, there were 996,037 shares of restricted stock granted with a weighted-average fair value of $10.39 per share. During the year ended December 31, 2019, there were 833,448 shares of restricted stock granted with a weighted-average fair value of $11.62 per share.
The total fair value of shares vested for the years ended December 31, 2021, 2020 and 2019 was $9.9 million, $8.6 million and $6.4 million, respectively.
As of December 31, 2021, total unrecognized compensation expense on restricted awards was approximately $8.6 million, and the expense is expected to be recognized over a weighted average vesting period of 0.8 years.
Performance Awards
The Company grants long-term incentives to members of management in the form of performance-based restricted stock units (“PSUs”) under the Equity Plan. The number of PSUs earned is based on the Company’s achievement of specified performance goals, over a specified performance period, and may range from 0% to 200% of the target shares. The PSUs have a service condition that will expire at the end of the three-year performance period provided that the holder continues to be employed by the Company at the end of the performance period. Holders of PSUs are entitled to dividend equivalents, which will be accrued and paid in cash upon the vesting of a PSU. Dividend equivalents are forfeited to the extent that the underlying PSU is forfeited.
On February 24, 2021, we issued 216,085 PSUs equal to 100% of the target amount, with an aggregate fair value of $3.5 million on the grant date. The PSUs, in addition to a service condition, are subject to the Company’s performance versus the total return of the MSCI US REIT Index and a triple-net lease peer group, as defined by the Compensation Committee. Upon evaluating the results of the market conditions, the final number of shares is determined, and such shares vest based on satisfaction of the service condition. The PSUs are amortized on a straight-line basis over the vesting period. During the year ended December 31, 2021, 75,463 PSUs were forfeited due to termination of service. The following table sets forth the number of unvested PSUs and the weighted-average fair value of these awards at the date of grant:
Performance Awards
Weighted Average Fair Value at Grant Date
Aggregate Intrinsic Value(1) ($000s)
Unvested balance December 31, 2020
706,570
$
17.64
Granted
216,085
$
16.27
Forfeited
(75,463
)
$
16.96
Vested
(224,077
)
$
18.96
Unvested balance, December 31, 2021
623,115
$
16.78
$
8,730
(1)
The aggregate intrinsic value is calculated as the market value of our common stock as of December 31, 2021. The market value as of December 31, 2021 was $14.01 per share, which was the closing price of our common stock reported for transactions effected on the NASDAQ Global Select Market on December 31, 2021, the final trading day of 2021.
During the year ended December 31, 2020, there were 322,209 PSUs granted with a weighted-average fair value of $15.45 per share. During the year ended December 31, 2019, there were 255,517 PSUs granted with a weighted-average fair value of $18.99 per share.
As of December 31, 2021, total unrecognized compensation expense related to PSUs was approximately $3.9 million, and the weighted-average vesting period was 1.2 years. The fair value of each PSU award is estimated at the date of grant using a Monte Carlo simulation. The simulation requires assumptions for expected volatility, risk-free return, and dividend yield. Our assumptions include a 0% dividend yield, which is the mathematical equivalent to reinvesting the dividends over the three-year performance period as is consistent with the terms of the PSUs. The following table summarizes the assumptions used to value the PSUs granted during the years ended December 31, 2021, 2020 and 2019:
Year Ended December 31,
Expected term (years)
3.0
3.0
3.0
Expected volatility
57.1
%
63.0
%
57.5
%
Expected annual dividend
0.0
%
0.0
%
0.0
%
Risk free rate
0.2
%
0.7
%
2.3
%
Employee Stock Purchase Plan
On May 17, 2018, our stockholders approved and adopted the Uniti Group Inc. Employee Stock Purchase Plan (the “ESPP”). The ESPP authorizes us to issue up to 2,000,000 shares of our common stock to any of our employees so long as the employee is employed on the first day of the applicable offering period. Under the ESPP, there are two six-month plan periods during each calendar year, one beginning January 1 and ending on June 30, and one beginning on July 1 and ending on December 31. Under the terms of the ESPP, employees can choose each plan period to have up to 15% of their annual base earnings, limited to $25,000 withheld to purchase our common stock. The purchase price of the stock is 85% of the lower of its beginning-of-period or end-of-period market price. Under the ESPP the Company issued 74,950, 96,788 and 83,287 shares during the years ended December 31, 2021, 2020 and 2019, respectively. As of December 31, 2021, there were 1,744,975 shares available for future issuance under the ESPP. The following table summarizes the assumptions used to value the purchase rights granted under the ESPP during the years ended December 31, 2021, 2020 and 2019:
Year Ended December 31,
Expected term (years)
0.5
0.5
0.5
Expected volatility
28.0
%
72.0
%
24.0
%
Expected annual dividend
5.5
%
3.9
%
2.1
%
Risk free rate
0.1
%
0.2
%
2.1
%
For the years ended December 31, 2021, 2020 and 2019, we recognized $13.8 million, $13.7 million and $10.8 million, respectively, of compensation expense related to restricted stock awards, performance-based awards and the ESPP, which is recorded in general and administrative expense on our Consolidated Statements of Income (Loss).
Note 14. Earnings Per Share
Our 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.
We also issue PSUs that contain forfeitable rights to receive dividends and are therefore considered non-participating restrictive shares and are not dilutive under the two-class method until performance conditions are met. During the year ended December 31, 2020, approximately 707,000 PSUs were excluded from the computation of diluted net loss per share because their effect is anti-dilutive as a result of our net loss for the period. During the year ended December 31, 2019, approximately 517,000 PSUs were excluded from the computation of diluted earnings per share because the performance conditions had not been met.
Prior to the second quarter of 2019, the earnings-per-share impact of the Company’s 3% Series A Convertible Preferred Stock, $0.0001 par value (the “Series A Shares”) (See Note 20), issued in connection with the May 2, 2016 acquisition of PEG Bandwidth, LLC, was calculated using the net share settlement method, whereby 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 provided Uniti the option to settle the instrument in cash or 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 the 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 year ended December 31, 2019 is calculated based on the shares outstanding from the issuance date through December 31, 2019.
The dilutive effect of the Exchangeable Notes (see Note 12) 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 the number of weighted average shares. The dilutive effect of the Warrants (see Note 10) is calculated using the treasury-stock method. During the years ended December 31, 2021, 2020 and 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 following sets forth the computation of basic and diluted earnings per share under the two-class method:
Year Ended December 31,
(Thousands, except per share data)
Basic earnings per share:
Numerator:
Net income (loss) attributable to shareholders
$
123,660
$
(706,301
)
$
10,582
Less: Income allocated to participating securities
(1,077
)
(1,078
)
(549
)
Dividends declared on convertible preferred stock
(10
)
(9
)
(656
)
Amortization of discount on convertible preferred stock
-
-
(993
)
Net income (loss) attributable to common shares
$
122,573
$
(707,388
)
$
8,384
Denominator:
Basic weighted-average common shares outstanding
232,888
203,600
187,358
Basic earnings (loss) per common share
$
0.53
$
(3.47
)
$
0.04
Year Ended December 31,
(Thousands, except per share data)
Diluted earnings per share:
Numerator:
Net income (loss) attributable to shareholders
$
123,660
$
(706,301
)
$
10,582
Less: Income allocated to participating securities
(1,077
)
(1,078
)
(549
)
Dividends declared on convertible preferred stock
(10
)
(9
)
(656
)
Amortization of discount on convertible preferred stock
-
-
(993
)
Impact on if-converted dilutive securities
11,926
-
-
Net income (loss) attributable to common shares
$
134,499
$
(707,388
)
$
8,384
Denominator:
Basic weighted-average common shares outstanding
232,888
203,600
187,358
Impact on if-converted dilutive securities
30,809
-
-
Effect of dilutive non-participating securities
-
-
Weighted-average shares for dilutive earnings per common share
264,077
203,600
187,358
Dilutive earnings (loss) per common share
$
0.51
$
(3.47
)
$
0.04
For the years ended December 31, 2020 and 2019, 29,777,226 and 14,221,616 potential common shares related to the Exchangeable Notes were excluded from the computation of earnings per share, as their effect would have been anti-dilutive.
Note 15. Segment Information
Historically our management, including our chief executive officer, who is our chief operating decision maker, managed our operations as four operating business segments in addition to our corporate operations, as described
below. Due to the sale of our towers business and wind down of the Consumer CLEC Business, effective January 1, 2021, we will manage our operations focused on our two primary businesses, Leasing and Fiber Infrastructure.
Leasing: Represents a component of our REIT operations and includes the results from our leasing business, Uniti Leasing, which is engaged in the acquisition and construction of mission-critical communications assets and leasing them back to anchor customers on either an exclusive or shared-tenant basis, in addition to the leasing of dark fiber on our existing dark fiber network assets that we either constructed or acquired.
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 former towers business, Uniti Towers, through which we acquired and constructed tower and tower-related real estate and leased space on communications towers to wireless service providers and other tenants in the United States and Latin America. The Company completed a series of transactions to largely divest of its towers business: on April 2, 2019, May 23, 2019 and June 1, 2020, the Company completed the sales of its Latin American business, substantially all of its U.S. ground lease business, and its U.S. tower business, respectively.
Consumer CLEC: Represents the operations of Talk America through which we operated the Consumer CLEC business, which prior to Uniti’s separation and spin-off from Windstream (the “Spin-Off”) was reported as an integrated operation within Windstream. Talk America provided local telephone, high-speed internet and long-distance services to customers in the eastern and central United States. As of the end of the second quarter of 2020, we substantially completed a wind down of our Consumer CLEC business.
Corporate: Represents our corporate office and shared service functions. Certain costs and expenses, primarily related to headcount, insurance, professional fees and similar charges, that are directly attributable to operations of our business segments are allocated to the respective segments.
Management evaluates the performance of each segment using Adjusted EBITDA, which is a segment performance measure we define as net income determined in accordance with GAAP, before interest expense, provision for income taxes, depreciation and amortization, stock-based compensation expense and the impact, which may be recurring in nature, of transaction and integration related costs, costs associated with Windstream’s bankruptcy, costs associated with litigation claims made against us, costs associated with the implementation of our enterprise resource planning system, executive severance costs, costs related to the settlement with Windstream, amortization of non-cash rights-of-use assets, the write off of unamortized deferred financing costs, costs incurred as a result of the early repayment of debt, including early tender and redemption premiums and costs associated with the termination of related hedging activities, gains or losses on dispositions, changes in the fair value of contingent consideration and financial instruments, and other similar or infrequent items (although we may not have had such charges in the periods presented). Adjusted EBITDA includes adjustments to reflect the Company’s share of Adjusted EBITDA from unconsolidated entities. The Company believes that net income, as defined by GAAP, is the most appropriate earnings metric; however, we believe that Adjusted EBITDA serves as a useful supplement to net income because it allows investors, analysts and management to evaluate the performance of our segments in a manner that is comparable period over period. Adjusted EBITDA should not be considered as an alternative to net income as determined in accordance with GAAP.
Selected financial data related to our segments is presented below for the years ended December 31, 2021, 2020 and 2019:
Year Ended December 31, 2021
(Thousands)
Leasing
Fiber Infrastructure
Towers
Consumer CLEC
Corporate
Total of Reportable Segments
Revenues
$
801,497
$
299,025
$
-
$
-
$
-
$
1,100,522
Adjusted EBITDA
$
784,061
$
118,452
$
-
$
-
$
(24,232
)
$
878,281
Less:
Interest expense, net
446,296
Depreciation and amortization
174,622
116,065
-
-
290,942
Other, net
24,917
Transaction related and other costs
7,544
Gain on sale of operations
(28,143
)
Gain on sale of real estate
(442
)
Stock-based compensation
13,847
Income tax benefit
(4,916
)
Adjustments for equity in earnings from unconsolidated entities
3,491
Net income
$
124,745
Capital expenditures (1)
$
223,251
$
162,463
$
-
$
-
$
$
385,855
Year Ended December 31, 2020
(Thousands)
Leasing
Fiber Infrastructure
Towers
Consumer CLEC
Corporate
Total of Reportable Segments
Revenues
$
745,915
$
314,363
$
6,112
$
$
-
$
1,067,041
Adjusted EBITDA
$
737,337
$
112,289
$
$
(545
)
$
(30,323
)
$
818,835
Less:
Interest expense, net
497,128
Depreciation and amortization
201,321
126,211
329,403
Other, net
11,703
Settlement expense
650,000
Goodwill impairment
71,000
Transaction related and other costs
63,875
Gain on sale of real estate
(86,267
)
Stock-based compensation
13,721
Income tax benefit
(15,203
)
Adjustments for equity in earnings from unconsolidated entities
2,287
Net loss
$
(718,812
)
Capital expenditures (1)
$
169,306
$
197,023
$
24,162
$
-
$
-
$
390,491
Year Ended December 31, 2019
(Thousands)
Leasing
Fiber Infrastructure
Towers
Consumer CLEC
Corporate
Total of Reportable Segments
Revenues
$
716,640
$
315,605
$
14,693
$
10,673
$
-
$
1,057,611
Adjusted EBITDA
$
711,119
$
126,754
$
(595
)
$
1,955
$
(26,494
)
$
812,739
Less:
Interest expense, net
390,112
Depreciation and amortization
282,107
114,566
6,474
1,879
405,754
Other, net
(24,219
)
Transaction related and other costs
43,708
Gain on sale of real estate
(28,995
)
Stock-based compensation
10,808
Income tax expense
4,663
Net income
$
10,908
Capital expenditures (1)
$
338,543
$
233,506
$
99,234
$
-
$
$
671,298
(1)
Segment capital expenditures represents capital expenditures, the Windstream Asset Purchase Agreement and Bluebird asset acquisition (see Note 6) as reported in the investing activities section of the Consolidated Statements of Cash Flows.
Total assets by business segment as of December 31, 2021 and December 31, 2020 are as follows:
December 31,
(Thousands)
Leasing
$
2,521,406
$
2,295,289
Fiber Infrastructure
2,249,860
2,354,569
Corporate
37,977
73,253
Consumer CLEC
-
8,707
Total of reportable segments
$
4,809,243
$
4,731,818
Note 16. Commitments and Contingencies
Litigation
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.
On July 25, 2019, in connection with Windstream’s bankruptcy, Windstream Holdings and Windstream Services, LLC (“Windstream Services”) filed a complaint with the Bankruptcy Court in an adversary proceeding against Uniti and certain of its affiliates, alleging, among other things, that the Master Lease should be recharacterized as a financing arrangement, that certain rent payments and TCIs made by Windstream under the Master Lease constitute constructive fraudulent transfers, that the Master Lease is a lease of personal property and that Uniti breached certain of its obligations under the Master Lease. On March 2, 2020, Uniti and Windstream jointly announced that they agreed to the Settlement (as defined below) to resolve any and all claims and causes of action that have been or may be asserted against Uniti by Windstream, including all litigation brought by Windstream and certain of its creditors in the context of Windstream’s bankruptcy, and on May 12, 2020, the Bankruptcy Court entered an order approving Windstream’s assumption of the Master Lease as part of the Settlement. As a result, during the second quarter of 2020, we estimated that $650.0 million of the consideration paid to Windstream should be classified as settlement of litigation, and therefore, recorded a $650.0 million charge. The charge represented our estimated fair value of the litigation settlement component of the Settlement.
On September 21, 2020, Windstream emerged from bankruptcy following its voluntary petition for relief under Chapter 11 of the Bankruptcy Code. In connection with Windstream’s emergence from bankruptcy, Uniti entered into several agreements and consummated the transactions, each as described herein, to implement its settlement (the “Settlement”) with Windstream pursuant to the settlement agreement (the “Settlement Agreement”) dated as of May 12, 2020 between Uniti and Windstream. Pursuant to the Settlement, Uniti and Windstream agreed to mutual releases with respect to any and all liability related to any claims and causes of action between them, including those brought by Windstream and certain of its creditors relating to Windstream’s Chapter 11 proceedings and the Master Lease.
On May 26, 2020, UMB Bank, National Association and U.S. Bank National Association, in their respective capacities as indenture trustees of Windstream’s bonds filed a notice of appeal in the United States District Court for the Southern District of New York from the bankruptcy court’s May 12, 2020 order approving the settlement. On July 20, 2020, UMB Bank, National Association withdrew from the appeal. The appeal was fully briefed on September 10, 2020. The district court has not yet issued a ruling on the appeal.
On January 8, 2021, Windstream filed in the bankruptcy court a stipulation and order dismissing the adversary proceeding against Uniti with prejudice subject to the terms set forth in the parties’ settlement agreement. The stipulation and order was entered by the bankruptcy court on January 25, 2021.
On June 22, 2021, the district court dismissed the appeal of the bankruptcy court’s order approving the settlement as equitably moot. On July 26, 2021, U.S. Bank National Association filed a notice of appeal in the United States Court of Appeals for the Second Circuit from the district court’s order. U.S. Bank filed its brief on November 21, 2021 and
Windstream and intervenor-appellee Elliott Investment Management L.P. filed their briefs on January 28, 2022. U.S. Bank National Association filed its reply brief on February 18, 2022.
Under the Settlement Agreement, in addition to completing the transactions and executing the Windstream Leases (see Note 5), Uniti is required to make quarterly cash payments of $24.5 million to Windstream over 20 consecutive quarters beginning in October 2020, and Uniti may prepay any installments falling due on or after the first anniversary of the Settlement’s effective date (discounted at a 9% rate). This obligation has been recorded at its initial fair value of $438.6 million and is reported as settlement payable on our Consolidated Balance Sheet at December 31, 2020. The difference between the initial fair value of the obligation and total undiscounted cash payments, $490.1 million, will be recognized as interest expense within our Consolidated Statements of Income (Loss) at an effective rate of 4.7%.
On October 14, 2021, the Company prepaid four installments for a total of $92.9 million, $78.0 million of which was funded from a portion of the proceeds of the 2030 Notes (see Note 12). As of December 31, 2021, the Company has made payments totaling $215.4 million.
Further, we are obligated to reimburse Windstream for up to an aggregate of $1.75 billion for certain growth capital improvements in long-term value accretive fiber and related assets made by Windstream (“Growth Capital Improvements”) through 2029. Uniti’s reimbursement commitment for Growth Capital Improvements does not require Uniti to reimburse Windstream for maintenance or repair expenditures (except for costs incurred for fiber replacements to the property leased under the competitive local exchange carrier master lease agreement, up to $70 million during the term), and each such reimbursement is subject to underwriting standards. Uniti’s total annual reimbursement commitments for the Growth Capital Improvements under both Windstream Leases (and under separate equipment loan facilities) are limited to $225 million per year in 2021 through 2024; $175 million per year in 2025 and 2026; and $125 million per year in 2027 through 2029. If the cost incurred by Windstream (or the successor tenant under a Windstream Lease) for Growth Capital Improvements in any calendar year exceeds the annual limit for such calendar year, Windstream (or such tenant, as the case may be) may submit such excess costs for reimbursement in any subsequent year and such excess costs shall be funded from the annual commitment amounts in such subsequent period. In addition, to the extent that reimbursements for Growth Capital Improvements funded in any calendar year during the term is less than the annual limit for such calendar year, the unfunded amount in any calendar year will carry-over and may be added to the annual limits for subsequent calendar years, subject to an annual limit of $250 million in any calendar year, except that, during calendar year 2021, our combined total obligation to fund Growth Capital Improvements may exceed $250 million to the extent of any unfunded excess amounts from calendar year 2020. Accordingly, because we funded $84.7 million of the $125 million limit in 2020, we were committed to fund up to $265.3 million of Growth Capital Improvements in 2021. During the year ended December 31, 2021, Uniti reimbursed $221.5 million of Growth Capital Improvements, of which $28.5 million, as allowed under the Settlement, represented the reimbursement of capital improvements completed in 2020 that were previously classified as tenant funded capital improvements.
Stock Purchase Agreements
On September 9, 2020, Uniti entered into stock purchase agreements (each, a “Stock Purchase Agreement”) with certain first lien creditors of Windstream to replace and codify the terms set forth in the previously-filed binding letters of intent, pursuant to which on September 18, 2020 Uniti sold an aggregate of 38,633,470 shares of Uniti common stock, par value $0.0001 per share (the “Settlement Common Stock”), at $6.33 per share, which represents the closing price of Uniti common stock on the date when an agreement in principle of the basic outline of the Settlement was first reached. Uniti transferred the proceeds from the sale of the Settlement Common Stock to Windstream as consideration relating to the Asset Purchase Agreement and in partial settlement of the litigation with Windstream.
Asset Purchase Agreement (see Note 6)
On September 18, 2020, and in furtherance of the Settlement Agreement, Uniti and Windstream closed an asset purchase agreement, as amended by a letter agreement (collectively, the “Asset Purchase Agreement”), pursuant to which (a) Uniti paid to Windstream approximately $284.6 million and (b) Windstream (i) granted to Uniti exclusive rights to use 1.8 million fiber strand miles leased by Windstream under the CLEC MLA, which fiber strands are
either unutilized or utilized under certain dark fiber indefeasible rights of use (“IRUs”) that were simultaneously transferred to Uniti, (ii) conveyed to Uniti fiber assets (and underlying rights) consisting of 0.4 million fiber strand miles (covering 4,000 route miles) owned by Windstream, and (iii) transferred and assigned to subsidiaries of Uniti dark fiber IRUs relating to (x) the fiber strand miles granted to Uniti under the CLEC MLA (and described in clause (i)) and (y) the fiber assets (and underlying rights) for the 0.4 million fiber strand miles conveyed to Uniti (and described in clause (ii)), which IRUs generated $28.9 million of annual EBITDA in the aggregate as of closing of the Asset Purchase Agreement. In addition, upon the transfer of the Windstream owned fiber assets (described in clause (ii) above), Uniti granted to Windstream a 20-year IRU for certain strands included in the transferred fiber assets.
Other Litigation
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 asserted 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. On September 26, 2019, the action was transferred to United States District Court for the District of Delaware. On November 18, 2019, SLF filed an amended complaint, adding allegations that Defendants also failed to fully disclose the risk that the Master Lease purportedly could be recharacterized as a financing instead of a “true lease.” The amended complaint seeks compensatory and punitive damages, as well as reformation of the purchase agreement for the sale. On December 18, 2019, Defendants moved to dismiss the amended complaint in its entirety. That motion was fully briefed as of February 7, 2020, and a hearing on the motion was heard on May 12, 2020. On November 4, 2020, the court granted the Defendants’ motion and dismissed SLF’s amended complaint, in its entirety, with prejudice. On December 1, 2020, SLF filed a notice of appeal to the United States Court of Appeals for the Third Circuit from the district court’s dismissal order. The appeal was fully briefed on September 10, 2021, and the Court of Appeals notified the parties that it will decide the appeal without oral argument. We have evaluated this matter under the guidance provided by ASC 450-20, Contingencies (“ASC 450”), and as of the date of this Annual Report on Form 10-K, we consider a loss not to be probable and are unable to estimate a reasonably possible range of loss; therefore, we have not recorded any liabilities associated with these claims in our Consolidated Balance Sheet.
Beginning on October 25, 2019, several purported shareholders filed separate putative class actions in the U.S. District Court for the Eastern District of Arkansas against the Company and certain of our officers, alleging violations of the federal securities laws, based on claims similar to those asserted in the SLF Action. On March 12, 2020, the U.S. District Court for the Eastern District of Arkansas consolidated the various shareholder actions and appointed lead plaintiffs and lead counsel in the consolidated cases under the caption In re Uniti Group Inc. Securities Litigation (the “Class Action”). On May 11, 2020, lead plaintiffs filed a consolidated amended complaint in the Class Action. The consolidated amended complaint seeks to represent investors who acquired the Company’s securities between April 20, 2015 and February 15, 2019. The Class Action asserts claims under Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder, alleging that the Company made materially false and misleading statements by allegedly failing to disclose, among other things, the risk that the Spin-Off and entry into the Master Lease violated certain debt covenants of Windstream and/or the risk that the Master Lease purportedly could be recharacterized as a financing instead of a “true lease.” The Class Action seeks class certification, unspecified monetary damages, costs and attorneys’ fees and other relief. On July 10, 2020, defendants moved to dismiss the consolidated amended complaint. On April 1, 2021, the court issued an order denying defendants’ motion to dismiss. On April 15, 2021, defendants filed a motion for reconsideration of the order or, in the alternative, for certification of an appeal of the decision to the Eighth Circuit. On December 22, 2021, the court issued an order denying defendants’ motion for reconsideration or, in the alternative, certification of an appeal. On October 25, 2021, plaintiffs filed a motion for class certification, which defendants have opposed. Discovery is ongoing. We intend to defend this matter vigorously, and, because it is still in its relatively early stages, we have not yet determined what effect this lawsuit will have, if any, on our financial position or results of operations. We have evaluated this matter under the guidance provided by ASC 450, and as of the date of this Annual Report on Form 10-K, we consider a loss not to be probable and are unable to estimate a reasonably possible range of loss; therefore, we have not recorded any liabilities associated with these claims in our Consolidated Balance Sheet.
On August 17, 2021, two purported shareholders filed a derivative action on behalf of Uniti in the Circuit Court for Baltimore City, Maryland, under the caption Mayer et al. v. Gunderman et al., 24-C-21-003488 (the “Derivative Action”). The Derivative Action names Kenneth Gunderman and Mark Wallace as defendants and the Company as a nominal defendant and asserts claims for breach of fiduciary duty and unjust enrichment. The complaint alleges that the individual defendants caused the Company to issue certain false and misleading statements relating to the Spin-Off and/or the Master Lease. In particular, as in the Class Action, the complaint alleges, among other things, that Defendants failed to disclose the risk that the Spin-Off and entry into the Master Lease violated certain debt covenants of Windstream and/or the risk that the Master Lease purportedly could be recharacterized as a financing instead of a “true lease.” The complaint seeks unspecified damages, unspecified equitable relief, and related costs and fees. The parties are currently discussing a potential stay of the action pending the outcome of the Class Action. On December 23, 2021, the court entered a joint stipulation to stay the Derivative Action pending the outcome of the Class Action, including the time for the defendants to respond to the complaint. Because this matter is still in its preliminary stages, we have not yet determined what effect this lawsuit will have, if any, on our financial position or results of operations. We have evaluated this matter under the guidance provided by ASC 450, and as of the date of this Annual Report on Form 10-K, we consider a loss not to be probable and are unable to estimate a reasonably possible range of loss; therefore, we have not recorded any liabilities associated with these claims in our Consolidated Balance Sheet.
On February 11, 2022, a purported shareholder filed a derivative action on behalf of Uniti in the federal District Court for the District of Maryland. The complaint names Kenneth Gunderman, Mark Wallace, Francis Frantz, David Solomon, Jennifer Banner, and Scott Bruce as defendants and the Company as a nominal defendant and asserts claims for contribution against Gunderman and Wallace if the Company is found to be liable for violations of the federal securities laws in the Class Action and claims against all the individual defendants for breaches of fiduciary duty, waste of corporate assets, and unjust enrichment against. The allegations in the complaint are similar to those in the Derivative Action and the Class Action. The complaint seeks unspecified damages, equitable relief, and related costs and fees. We intend to defend this matter vigorously, and, because it is still in its relatively early stages, we have not yet determined what effect this lawsuit will have, if any, on our financial position or results of operations. We have evaluated this matter under the guidance provided by ASC 450, and as of the date of this Annual Report on Form 10-K, we consider a loss not to be probable and are unable to estimate a reasonably possible range of loss; therefore, we have not recorded any liabilities associated with these claims in our Consolidated Balance Sheet.
We maintain insurance policies that would provide coverage to various degrees for potential liabilities arising from the legal proceedings described above.
Under the terms of the tax matters agreement entered into on April 24, 2015 by the Company, Windstream Services, LLC and Windstream (the “Tax Matters Agreement”), in connection with the Spin-Off, we are generally responsible for any taxes imposed on Windstream that arise from the failure of the Spin-Off and the debt exchanges to qualify as tax-free for U.S. federal income tax purposes, within the meaning of Section 355 and Section 368(a)(1)(D) of the Code, as applicable, to the extent such failure to qualify is attributable to certain actions, events or transactions relating to our stock, indebtedness, assets or business, or a breach of the relevant representations or any covenants made by us in the Tax Matters Agreement, the materials submitted to the IRS in connection with the request for the private letter ruling or the representations provided in connection with the tax opinion. We believe that the probability of us incurring obligations under the Tax Matters Agreement are remote; and therefore, we have recorded no such liabilities in our Consolidated Balance Sheet as of December 31, 2021.
Note 17. Accumulated Other Comprehensive Income
Changes in accumulated other comprehensive income (loss) by component is as follows for the years ended December 31, 2021, 2020 and 2019:
(Thousands)
Cash flow hedge changes in fair value gain (loss):
Balance at beginning of period
$
(30,353
)
$
(23,442
)
$
30,042
Other comprehensive loss before reclassifications
-
(7,713
)
(51,288
)
Amounts reclassified from accumulated other comprehensive income
-
(3,324
)
Net other comprehensive loss
(30,353
)
(30,478
)
(24,570
)
Less: Other comprehensive loss attributable to noncontrolling interest
-
(125
)
(1,128
)
Balance at end of period
(30,353
)
(30,353
)
(23,442
)
Interest rate swap termination:
Balance at beginning of period attributable to common shareholders
9,986
-
-
Amounts reclassified from accumulated other comprehensive income
11,317
10,155
-
Balance at end of period
21,303
10,155
-
Less: Other comprehensive income attributable to noncontrolling interest
-
Balance at end of period attributable to common shareholders
21,189
9,986
-
Foreign currency translation gain (loss):
Balance at beginning of period
-
-
Translation adjustments
-
-
-
Amounts reclassified from accumulated other comprehensive income
-
-
(63
)
Net other comprehensive income (loss)
-
-
-
Less: Other comprehensive income (loss) attributable to noncontrolling interest
-
-
-
Balance at end of period
-
-
-
Accumulated other comprehensive income (loss) at end of period
$
(9,164
)
$
(20,367
)
$
(23,442
)
Note 18. Income Taxes
We elected on our initial U.S. federal income tax return to be treated as a REIT under the Code. To qualify as a REIT, we must distribute at least 90% of our annual REIT taxable income, determined without regard to the dividends paid deduction and excluding any capital gains, to shareholders, and meet certain organizational and operational requirements, including asset holding requirements. As a REIT, we will generally not be subject to U.S. federal income tax on income that we distribute as dividends to our shareholders. If we fail to qualify as a REIT in any taxable year unless certain relief provisions apply, we will be subject to U.S. federal income tax, including any applicable alternative minimum tax for open taxable years through 2017, on our taxable income at regular corporate income tax rates, and we could not deduct dividends paid to our shareholders in computing taxable income. Any resulting corporate liability could be substantial and could materially and adversely affect our net income and net cash available for distribution to shareholders. Unless we were entitled to relief under certain Code provisions, we also would be disqualified from reelecting to be taxed as a REIT for the four taxable years following the year in which we failed to qualify as a REIT.
Subject to the restrictions imposed by our 7.875% senior secured notes due 2025 (see Note 12), our ability to make cash distributions to our shareholders in amounts exceeding 90% of our good faith estimate, as of the date on which the first quarterly dividend for the relevant year is declared, of our REIT taxable income for such year, determined without regard to the dividends paid deduction and excluding any capital gains, until we reduce our net leverage ratio. As a result, we may be required to record a provision in our Consolidated Financial Statements for U.S. federal income taxes related to the activities of the REIT and its passthrough subsidiaries for any undistributed income. We are subject to the statutory requirements of the locations in which we conduct business, and state and local income taxes are accrued as deemed required in the best judgment of management based on analysis and interpretation of respective tax laws.
We have elected to treat the subsidiaries through which we operate Uniti Fiber and Talk America as 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.
Income tax expense (benefit) for the years ended December 31, 2021, 2020 and 2019 as reported in the accompanying Consolidated Statements of Income (Loss) was comprised of the following:
Year Ended December 31,
(Thousands)
Current
Federal
$
(71
)
$
(901
)
$
10,401
State
1,622
(498
)
2,742
Foreign
-
2,948
Total current expense
1,551
(1,312
)
16,091
Deferred
Federal
(5,066
)
(7,665
)
(9,378
)
State
(1,401
)
(6,226
)
(2,050
)
Total deferred expense
(6,467
)
(13,891
)
(11,428
)
Total income tax (benefit) expense
$
(4,916
)
$
(15,203
)
$
4,663
An income tax expense reconciliation between the U.S. statutory tax rate and the effective tax rate is as follows:
Year Ended December 31,
(Thousands)
Income from continuing operations, before tax
$
119,844
$
(734,015
)
$
15,571
Income tax at U.S. statutory federal rate
25,167
(154,143
)
3,270
Increases (decreases) resulting from:
State taxes, net of federal benefit
(3,452
)
Benefit of REIT status
(30,565
)
129,742
(2,188
)
Goodwill impairment
-
14,910
-
Return to accrual
(2,795
)
Permanent differences
Foreign taxes
-
2,948
Income tax (benefit) expense
$
(4,916
)
$
(15,203
)
$
4,663
The effective tax rate on income from continuing operations differs from tax at the statutory rate primarily due to our status as a REIT.
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
The components of the Company's deferred tax assets and liabilities are as follows:
(Thousands)
December 31, 2021
December 31, 2020
Deferred tax assets:
Deferred revenue
$
29,275
$
34,207
Accrued bonuses
-
Stock-based compensation
Accrued expenses and other
Asset retirement obligation
1,791
1,429
Inventory reserve
Excess business interest expense
Lease asset liability
13,952
16,842
Settlement obligation
Debt discount and interest expense
10,040
-
Other
2,215
3,032
Net operating loss carryforwards
139,020
126,464
Deferred tax assets
198,135
184,189
Deferred tax liabilities:
Property, plant and equipment
$
(97,372
)
$
(103,441
)
Customer list intangible
(40,941
)
(42,898
)
Other intangible amortization
(28,689
)
(24,852
)
Right of use asset
(16,039
)
(18,443
)
Deferred or prepaid costs
(3,373
)
(3,041
)
Debt discount and interest expense
-
(2,034
)
Other
-
(20
)
Deferred tax liabilities
$
(186,414
)
$
(194,729
)
Deferred tax asset (liability), net
$
11,721
$
(10,540
)
As of December 31, 2021, the Company’s deferred tax assets were primarily the result of U.S. federal and state NOL carryforwards.
As of each reporting date, the Company’s management considers new evidence, both positive and negative, that could impact management’s view with regard to future realization of deferred tax assets. Given the Company has significant deferred tax liabilities, management determined that sufficient positive evidence exists as of December 31, 2021, to conclude that it is more likely than not that all of its deferred tax assets are realizable, and therefore, no valuation allowance has been recorded.
On August 31, 2016, we acquired 100% of the outstanding equity of Tower Cloud, Inc., which had federal NOL carryforwards of approximately $81.2 million at the date of the acquisition. As a result of the change in ownership, the utilization of Tower Cloud, Inc. NOL carryforwards is subject to limitations imposed by the Code. Approximately $18.3 million of the Tower Cloud, Inc. NOL carryforward was utilized in 2017. The remaining Tower Cloud, Inc. NOL carryforwards will expire between 2026 and 2036.
We have total federal NOL carryforwards as of December 31, 2021 of approximately $165.2 million which will expire between 2026 and 2037, and approximately $375.4 million which will not expire but the utilization of which will be limited to 80% of taxable income annually under provisions enacted in the Tax Cut and Jobs Act.
With the exception of Tower Cloud, Inc. and Uniti Fiber Holdings Inc., our 2018 returns remain open to examination. As Tower Cloud, Inc. and Uniti Fiber Holdings Inc. have NOLs available to carry forward, the applicable tax years will generally remain open to examination several years after the applicable loss carryforwards have been utilized or expire.
The Company or its subsidiaries file tax returns in the U.S. federal jurisdiction, various state and local jurisdictions, and certain foreign jurisdictions. A reconciliation of the Company’s beginning and ending liability for unrecognized tax benefits is as follows:
(Thousands)
Balance at January 1
$
1,734
$
1,734
Balance at December 31
$
1,734
$
1,734
The Company’s entire liability for unrecognized tax benefit would affect the annual effective tax rate if recognized.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits as additional tax expense. The Company recorded no interest expense and penalties for the period ending December 31, 2021. The Company’s balance of accrued interest and penalties related to unrecognized tax benefits as of December 31, 2021 was $1.3 million.
Note 19. Supplemental Cash Flow Information
Cash paid for interest expense, net of capitalized interest and income taxes, net of refunds for the years ended December 31, 2021, 2020 and 2019 is as follows:
Year Ended December 31,
(Thousands)
Cash payments for:
Interest, net of capitalized interest
$
375,578
$
314,276
$
344,464
Income taxes, net of refunds
$
1,386
$
1,155
$
16,073
Note 20. Capital Stock
The limited partner equity interests in our operating partnership (commonly called “OP Units”), are exchangeable on a one-for-one basis for shares of our common stock or, at our election, cash of equivalent value. During the year ended December 31, 2021, the Company exchanged 2,768,199 OP Units held by a third party for an equal number of common shares of the Company. The OP Units exchanged represented approximately 80% of the OP Units held by a third party with a carrying value of $55.2 million as of the exchange date.
On September 9, 2020, Uniti entered into stock purchase agreements with certain first lien creditors of Windstream to replace and codify the terms set forth in the previously-filed binding letters of intent, pursuant to which on September 18, 2020 Uniti sold an aggregate of 38,633,470 shares of Uniti common stock, par value $0.0001 per share (the “Settlement Common Stock”), at $6.33 per share, which represents the closing price of Uniti common stock on the date when an agreement in principle of the basic outline of the Settlement was first reached. Uniti transferred the proceeds from the sale of the Settlement Common Stock to Windstream as consideration relating to the Asset Purchase Agreement and settlement of the litigation with Windstream. The issuance and sale of the Settlement Common Stock was made in reliance upon the exemption from registration requirements pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended. Certain recipients of the Settlement Common Stock are subject to a one-year lock up, and all recipients are subject to a customary standstill agreement. No recipient will receive any governance rights in connection with the issuance. The binding letters of intent and the Stock Purchase Agreements also provide for customary registration rights.
On June 22, 2020, we established an at-the-market common stock offering program (the “ATM Program”) to sell shares of our common stock, par value $0.0001 per share, having an aggregate offering price of up to $250 million. This offering supersedes and replaces the $250 million program we commenced on September 2, 2016, which had
approximately $117.1 million available for issuance under such program. We have not made any sales under the refreshed ATM Program. This program is 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.
On July 2, 2019, the Company issued 8,677,163 shares of its 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 total value of $87.5 million, with the total number of 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.
We are authorized to issue up to 500,000,000 shares of voting common stock and 50,000,000 shares of preferred stock, of which 234,779,247 and 0 shares, respectively, were outstanding at December 31, 2021. We had 265,220,753 shares of voting common stock available for issuance at December 31, 2021.
Note 21. Dividends (Distributions)
Distributions with respect to our common stock is characterized for federal income tax purposes as taxable ordinary dividends, capital gains dividends, non-dividend distribution or a combination thereof. For the years ended December 31, 2021, 2020, and 2019, our common stock distribution per share was $0.45, $0.60 and $0.97, respectively, characterized as follows:
Year Ended December 31,
2021 (1)
2020 (2)
2019(3)
Ordinary dividends
$
0.45
$
0.52
$
0.97
Capital gain distribution
$
-
$
0.08
$
-
Non-dividend distributions
-
-
-
Total
$
0.45
$
0.60
$
0.97
(1) Pursuant to Internal Revenue Code Section 857(b)(9), if you were a stockholder of record as of December 17, 2021, your dividend payment of $0.1500 per share received in January 2022 will be reported on Form 1099-DIV for the 2022 taxable year for federal income tax purposes.
(2)
Pursuant to Internal Revenue Code Section 857(b)(9), if you were a stockholder of record as of December 15, 2020, your dividend payment of $0.1500 per share received in January 2021 was reported on Form 1099-DIV for the 2020 taxable year for federal income tax purposes.
(3)
Pursuant to Internal Revenue Code Section 857(b)(9), if you were a stockholder of record as of December 31, 2019, your dividend payment of $0.2200 per share received in January 2020 was reported on Form 1099-DIV for the 2019 taxable year for federal income tax purposes.
Note 22. Employee Benefit Plan
We sponsor a defined contribution plan under section 401(k) of the Internal Revenue Code, which covers employees who are 21 years of age and over. Under this plan, we match voluntary employee contributions at a rate of 100% for the first 3% of an employee’s annual compensation and at a rate of 50% for the next 2% of an employee’s annual compensation. Employees vest in our contribution immediately. Our expense related to the plan recognized for the years ended December 31, 2021, 2020 and 2019 was $2.1 million, $2.2 million and $1.7 million, respectively.
We sponsor a deferred compensation plan. The plan is established and maintained by the Company primarily to permit certain management or highly compensated employees of the Company and its subsidiaries, within the meaning of Section 301(a) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), to defer a percentage of their compensation. The plan is an unfunded deferred compensation plan intended to qualify
for the exemptions provided in, and shall be administered in a manner consistent with Section 201, 301 and 401 of ERISA and Section 409A of the Internal Revenue Code of 1986, as amended.

---

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.

---

ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under 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 December 31, 2021. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2021.
Remediation of Previously Disclosed Material Weakness in Internal Control Over Financial Reporting
As disclosed in “Part II. Item 9A. Controls and Procedures” in our Annual Report on Form 10-K for the year ended December 31, 2020, during the fourth quarter of 2020, we identified the following material weakness in our internal control over financial reporting. The Company had ineffective controls over the annual goodwill impairment assessment, specifically, the control activities over the determination of the carrying value to be used in the assessment of goodwill impairment did not operate effectively due to an insufficient complement of qualified personnel. Management initiated a plan to remediate the material weakness and implemented improvements to the design and operation of control activities and procedures associated with the determination of the carrying value to be used in the assessment of goodwill impairment, in addition to the hiring of incremental qualified personnel.
During the quarter ended December 31, 2021, we completed our testing of the design and operating effectiveness of the actions discussed above. We have concluded that the enhanced control processes have now been designed, in addition to the hiring of incremental qualified personnel, so as to provide reasonable assurance as to their operating effectiveness, and, as a result, we believe that the material weakness described above was remediated as of December 31, 2021.
Management believes that our consolidated financial statements included in this Annual Report on Form 10-K have been prepared in accordance with US GAAP. Our principal executive officer and principal financial officer have certified that, based on such officer’s knowledge, the consolidated financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report.
Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:
•
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
•
•
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.
Our management, with the participation of our principal executive officer and principal financial officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2021. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework (2013).
Based on this evaluation under the framework in Internal Control - Integrated Framework (2013) issued by COSO, management concluded the Company’s internal control over financial reporting was effective as of December 31, 2021.
The Company’s independent registered public accounting firm, KPMG LLP, who audited the consolidated financial statements included in this Annual Report on Form 10-K, has also audited the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021. KPMG LLP’s report appears in Part II, Item 8 of this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
Other than the changes made in response to the material weakness as described 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, during the quarter ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information.
None.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance.
Except as set forth below, the information required by this item is incorporated by reference from the definitive proxy statement to be filed within 120 days after December 31, 2021, pursuant to Regulation 14A under the Exchange Act in connection with our 2022 annual meeting of stockholders.
We have a code of ethics as defined in Item 406 of Regulation S-K, which code applies to all of our directors and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions. A copy of this code of ethics, titled “Code of Business Conduct and Ethics and Whistleblower Policy,” is available free of charge in the Corporate Governance section of the About Us page on our website at www.uniti.com. We intend to satisfy the disclosure requirements of Form 8-K regarding any amendment to, or a waiver from, any provision of our code of ethics by posting such amendment or waiver on our website.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation.
The information required by this item is incorporated by reference from the definitive proxy statement to be filed within 120 days after December 31, 2021, pursuant to Regulation 14A under the Exchange Act in connection with our 2022 annual meeting of stockholders.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Except as set forth below, the information required by this item is incorporated by reference from the definitive proxy statement to be filed within 120 days after December 31, 2021, pursuant to Regulation 14A under the Exchange Act in connection with our 2022 annual meeting of stockholders.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table contains information about our equity compensation plan as of December 31, 2021:
Equity Compensation Plan Information
Plan category
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
Weighted-average
exercise price of
outstanding options,
warrants and rights
Number of securities
available for future issuance
under equity compensation
plans (excluding securities
reflected in column (a))
(a)
(b)
(c)
Equity compensation plans approved by security holders
-
-
4,421,7511
Equity compensation plans not approved by security holders
-
-
-
Total
-
-
4,421,751
Amount includes 2,676,776 shares available for issuance under the Uniti Group Inc. 2015 Equity Incentive Plan and 1,744,975 shares under the Uniti Group Inc. Employee Stock Purchase Plan.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this item is incorporated by reference from the definitive proxy statement to be filed within 120 days after December 31, 2021, pursuant to Regulation 14A under the Exchange Act in connection with our 2022 annual meeting of stockholders.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accounting Fees and Services.
The information required by this item is incorporated by reference from the definitive proxy statement to be filed within 120 days after December 31, 2021, pursuant to Regulation 14A under the Exchange Act in connection with our 2022 annual meeting of stockholders.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits, Financial Statement Schedules.
Financial Statements
See Index to Consolidated Financial Statements in “Financial Statements and Supplementary Data.”
Financial Statement Schedules
Uniti Group Inc. Schedule I - Condensed Financial Information of the Registrant (Parent Company) Condensed Balance Sheets as of December 31, 2021 and 2020, and the related Condensed Statements of Comprehensive Income and Cash Flows for each of the three years in the period ended December 31, 2021, including the related notes, appearing on pages S-1, S-2, S-3, and S-4 of this report.
Uniti Group Inc. Schedule II - Valuation and Qualifying Accounts for each of the three years in the period ended December 31, 2021 appearing on page S-5 of this report.
Uniti Group Inc. Schedule III - Schedule of Real Estate Investments and Accumulated Depreciation as of December 31, 2021 appearing on page S-6 of this report.
Index to Exhibits
Exhibit No.
Description
2.1
Separation and Distribution Agreement, dated as of March 26, 2015, by and among Windstream Holdings, Inc., Windstream Services, LLC and Communications Sales & Leasing, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K dated and filed with the SEC as of March 26, 2015 (File No. 001-36708))
2.2
Agreement and Plan of Merger, dated as of January 7, 2016, by and among Communications Sales & Leasing, Inc., CSL Bandwidth Inc., Penn Merger Sub, LLC, PEG Bandwidth, LLC, PEG Bandwidth Holdings, LLC, and PEG Bandwidth Holdings, LLC, as Unitholders’ Representative (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K dated and filed with the SEC as of January 12, 2016 (File No. 001-36708))
2.3**
Agreement and Plan of Merger, dated as of June 20, 2016, by and among Communications Sales & Leasing, Inc., CSL Fiber Holdings LLC, Thor Merger Sub, Inc., Tower Cloud, Inc. and Shareholder Representative Services LLC, as representative of the equityholders of Tower Cloud, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Quarterly Report on Form 10-Q dated and filed with the SEC as of August 11, 2016 (File No. 001-36708))
2.4
First Amendment, dated as of August 11, 2016, to the Agreement and Plan of Merger, dated as of June 20, 2016, by and among Communications Sales & Leasing, Inc., CSL Fiber Holdings LLC, Thor Merger Sub, Inc., Tower Cloud, Inc. and Shareholder Representative Services LLC, as representative of the equityholders of Tower Cloud, Inc. (incorporated by reference to Exhibit 2.2 to the Company’s Quarterly Report on Form 10-Q dated and filed with the SEC as of August 11, 2016 (File No. 001-36708))
2.5
Membership Interests Purchase Agreement, dated as of April 7, 2017, by and among Uniti Group Inc., Uniti Fiber Holdings Inc. and SLF Holdings, LLC (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K dated and filed with the SEC as of April 11, 2017 (File No. 001-36708))
2.6
Amended and Restated Agreement of Limited Partnership of Uniti Group LP, dated July 3, 2017, by and between Uniti Group Inc. and Uniti Group LP LLC (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K dated and filed with the SEC as of July 3, 2017 (File No. 001-36708))
Exhibit No.
Description
3.1
Articles of Amendment and Restatement of Communications Sales & Leasing, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K dated and filed with the SEC as of April 10, 2015 (File No. 001-36708))
3.2
Articles of Amendment of Communications Sales & Leasing, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K dated and filed with the SEC as of February 28, 2017 (File No. 001-36708))
3.3
Articles of Amendment of Uniti Group Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K dated and filed with the SEC as of May 18, 2018 (File No. 001-36708))
3.4
Amended and Restated Bylaws of Uniti Group Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K dated as of May 1, 2017 and filed with the SEC as of May 2, 2017 (File No. 001-36708))
4.1
Description of the Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934 (incorporated by reference to Exhibit 4.22 to the Company’s Annual Report on Form 10-K filed with the SEC as of March 12, 2020 (File No. 001-36708))
4.2
Indenture, dated as of June 28, 2019, among Uniti Fiber Holdings, Inc., as issuer, Uniti Group Inc. and the other guarantors named therein, as guarantors, and Deutsche Bank Trust Company Americas, as trustee, governing the 4.00% Exchangeable Senior Notes due 2024 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated June 25, 2019 and filed with the SEC as of June 28, 2019 (File No. 001-36708))
4.3
Form of 4.00% Exchangeable Senior Notes due 2024 (included in Exhibit 4.7 above) (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K dated June 25, 2019 and filed with the SEC as of June 28, 2019 (File No. 001-36708))
4.4
Indenture, dated as of February 10, 2020, among Uniti Group LP, Uniti Fiber Holdings Inc., Uniti Group Finance 2019 Inc., CSL Capital, LLC, the guarantors named therein, and Deutsche Bank Trust Company Americas, as trustee and collateral agent, governing the 7.875% Senior Secured Notes due 2025 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on February 10, 2020 (File No. 001-36708))
4.5
Form of 7.875% Senior Secured Notes due 2025 (included in Exhibit 4.10 above) (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the SEC on February 10, 2020 (File No. 001-36708))
4.6
Indenture, dated February 2, 2021, by and among Uniti Group LP, Uniti Group Finance 2019 Inc. and CSL Capital, LLC, as Issuers, the guarantors party thereto and Deutsche Bank Trust Company Americas, as trustee, governing the 6.500% Senior Notes due 2029 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated and filed with the SEC as of February 2, 2021 (File No. 001-36708))
4.7
Form of 6.500% Senior Notes due 2029 (included in Exhibit 4.12) (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K dated and filed with the SEC as of February 2, 2021 (File No. 001-36708))
4.8
Indenture, dated as April 20, 2021, by and among Uniti Group LP, Uniti Group Finance 2019 Inc. and CSL Capital, LLC, as issuers, the guarantors party thereto, and Deutsche Bank Trust Company Americas, as trustee and collateral agent, governing the 4.750% Senior Secured Notes due 2028 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on April 20, 2021 (File No. 001-36708))
4.9
Form of 4.750% Senior Secured Notes due 2028 (included in Exhibit 4.14 above) (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the SEC on April 20, 2021 (File No. 001-36708))
Exhibit No.
Description
4.10
Indenture, dated October 13, 2021, by and among Uniti Group LP, Uniti Fiber Holdings Inc., Uniti Group Finance 2019 Inc. and CSL Capital, LLC, as Issuers, the guarantors party thereto and Deutsche Bank Trust Company Americas, as trustee, governing the 6.000% Senior Notes due 2030 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated and filed with the SEC as of October 13, 2021 (File No. 001-36708))
4.11
Form of 6.000% Senior Notes due 2030 (included in Exhibit 4.16 above) (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K dated and filed with the SEC as of October 13, 2021 (File No. 001-36708))
10.1
Settlement Agreement, dated as of May 12, 2020 by and among Windstream Holdings, Inc., Windstream Services, LLC and certain of their subsidiaries, and Uniti Group Inc. and certain of its subsidiaries (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on May 15, 2020 (File No. 001-36708))
10.2
Amended and Restated ILEC Master Lease, entered into as of September 18, 2020, by and between CSL National, LP and the other entities listed therein, as Landlord, and Windstream Holdings II, LLC (as successor in interest to Windstream Holdings, Inc.), Windstream Services II, LLC (as successor in interest to Windstream Services, LLC) and the other entities listed therein, as Tenant (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on November 9, 2020 (File No. 001-36708))
10.3
Amended and Restated CLEC Master Lease, entered into as of September 18, 2020, by and between CSL National, LP and the other entities listed therein, as Landlord, and Windstream Holdings II, LLC (as successor in interest to Windstream Holdings, Inc.), Windstream Services II, LLC (as successor in interest to Windstream Services, LLC) and the other entities listed therein, as Tenant (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on November 9, 2020 (File No. 001-36708))
10.4
Tax Matters Agreement, entered into as of April 24, 2015, by and among Windstream Holdings, Inc., Windstream Services, LLC and Communications Sales & Leasing, Inc. (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated and filed with the SEC as of April 27, 2015 (File No. 001-36708))
10.5
Credit Agreement, dated as of April 24, 2015, by and among Communications Sales & Leasing, Inc. and CSL Capital, LLC, as Borrowers, the guarantors party thereto, the lenders party thereto from time to time and Bank of America, N.A., as administrative agent, collateral agent, swing line lender and L/C issuer (incorporated by reference to Exhibit 10.10 to the Company’s Current Report on Form 8-K dated and filed with the SEC as of April 27, 2015 (File No. 001-36708))
10.6
Amendment No. 1 to the Credit Agreement, dated as of October 21, 2016 by and among Communications Sales & Leasing, Inc. and CSL Capital, LLC, as borrowers, the guarantors party thereto, the lenders party thereto, and Bank of America, N.A., as administrative agent and collateral agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated and filed with the SEC as of October 21, 2016 (File No. 001-36708))
10.7
Amendment No. 2 to the Credit Agreement, dated as of February 9, 2017 by and among Communications Sales & Leasing, Inc. and CSL Capital, LLC, as borrowers, the guarantors party thereto, the lenders party thereto, and Bank of America, N.A., as administrative agent and collateral agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated and filed with the SEC as of February 9, 2017 (File No. 001-36708))
10.8
Amendment No. 3 (Incremental Amendment) to the Credit Agreement, dated as of April 28, 2017 by and among Uniti Group Inc. and CSL Capital, LLC, as borrowers, the guarantors party thereto, the lenders party thereto, and Bank of America, N.A., as administrative agent and collateral agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated as of May 1, 2017 and filed with the SEC as of May 2, 2017 (File No. 001-36708))
Exhibit No.
Description
10.9
Amendment No. 4 and Limited Waiver to the Credit Agreement, dated as of March 18, 2019, among Uniti Group Inc., as parent guarantor, Uniti Group LP, Uniti Group Finance Inc. and CSL Capital, LLC, as borrowers, the guarantors party thereto, the lenders party thereto, and Bank of America, N.A., as administrative agent and collateral agent (incorporated by reference to Exhibit 10.11 to the Company’s Annual Report on Form 10-K dated and filed with the SEC as of March 18, 2019 (File No. 001-36708))
10.10
Amendment No. 5 to the Credit Agreement, dated as of June 24, 2019, among Uniti Group Inc., as parent guarantor, Uniti Group LP, Uniti Group Finance Inc., and CSL Capital, LLC, as borrowers, the guarantors party thereto, the lenders party thereto, and Bank of America, N.A., as administrative agent and collateral agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated and filed with the SEC as of June 24, 2019 (File No. 001-36708))
10.11
Amendment No. 6 and Limited Waiver to the Credit Agreement, dated as of February 10, 2020, among Uniti Group LP, Uniti Group Finance 2019 Inc. and CSL Capital, LLC, as borrowers, the guarantor party thereto, the lenders party thereto, and Bank of America, N.A., as administrative agent and collateral agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on February 10, 2020 (File No. 001-36708))
10.12
Amendment No. 7 to the Credit Agreement, dated as of December 10, 2020, by and among Uniti Group Inc., as parent guarantor, Uniti Group LP, Uniti Group Finance Inc., and CSL Capital, LLC, as borrowers, the guarantors party thereto, the lenders party thereto, and Bank of America, N.A., as administrative agent and collateral agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated and filed with the SEC as of December 10, 2020 (File No. 001-36708))
10.13
Agreement of Resignation, Appointment and Acceptance, dated as of June 26, 2019, by and among Uniti Group LP, CSL Capital, LLC, Uniti Group Finance, Inc., and Uniti Fiber Holdings, Inc., as Issuers, and Deutsche Bank Trust Company Americas, as successor trustee, and Wells Fargo Bank, N.A., as resigning trustee (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q dated and filed with the SEC as of August 8, 2019 (File No. 001-36708))
10.14
Borrower Assumption Agreement and Joinder, dated as of May 9, 2017 by and among Uniti Group Inc., as initial borrower, Uniti Group LP and Uniti Group Finance Inc., as borrowers, the guarantors party thereto, the lenders party thereto, and Bank of America, N.A., as administrative agent and collateral agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated and filed with the SEC as of May 9, 2017 (File No. 001-36708))
10.15
Recognition Agreement, dated April 24, 2015, by and among CSL National, LP and the other entities listed therein, as Landlord, and Windstream Holdings, Inc., as Tenant, and JPMorgan Chase Bank, N.A., as administrative agent and collateral agent (incorporated by reference to Exhibit 10.11 to the Company’s Current Report on Form 8-K dated and filed with the SEC as of April 27, 2015 (File No. 001-36708))
10.16+
Employment Agreement between Uniti Group Inc. and Kenneth Gunderman, effective as of December 14, 2018 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated and filed with the SEC as of December 14, 2018 (File No. 001-36708))
10.17+
Severance Agreement, dated as of December 30, 2020, by and between Uniti Group Inc. and Daniel L. Heard (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated and filed with the SEC as of December 30, 2020 (File No. 001-36708))
10.18+
Uniti Group Inc. 2015 Equity Incentive Plan, as amended and restated effective March 28, 2018 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated and filed with the SEC as of March 29, 2018 (File No. 001-36708))
10.19+
Form of Restricted Shares Agreement for employees (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K dated and filed with the SEC as of June 3, 2015 (File No. 001-36708))
Exhibit No.
Description
10.20+
Form of Restricted Shares Agreement for employees (incorporated by reference to Exhibit 10.19 to the Company’s Annual Report on Form 10-K dated and filed with the SEC as of March 18, 2019 (File No. 001-36708))
10.21+
Form of Performance-Based Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K dated and filed with the SEC as of June 3, 2015 (File No. 001-36708))
10.22+
Form of Performance-Based Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.21 to the Company’s Annual Report on Form 10-K dated and filed with the SEC as of March 18, 2019 (File No. 001-36708))
10.23+
Form of Restricted Shares Agreement for non-employee directors (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K dated and filed with the SEC as of June 3, 2015 (File No. 001-36708))
10.24+
Form of Indemnity Agreement (incorporated by reference to Exhibit 10.20 to the Company’s Registration Statement on Form S-4 dated and filed with the SEC as of July 2, 2015 (File No. 333-205450))
10.25+
Communications Sales & Leasing, Inc. Deferred Compensation Plan, effective August 10, 2015 (incorporated by reference to Exhibit 10.20 to the Company’s Quarterly Report on Form 10-Q dated and filed with the SEC as of August 13, 2015 (File No. 001-36708))
10.26+
Uniti Group Inc. Amended and Restated Employee Stock Purchase Plan (incorporated by reference to Exhibit 99.1 to the Company’s Registration Statement on Form S-8 dated and filed with the SEC as of June 7, 2018 (File No. 333-225501))
10.27+
Uniti Group Inc. Annual Short-Term Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q dated and filed with the SEC as of May 11, 2020 (File No. 001-36708))
21.1*
List of Subsidiaries of Uniti Group Inc.
23.1*
Consent of KPMG LLP, independent registered public accounting firm
23.2*
Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm
31.1*
Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
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101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
Exhibit No.
Description
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
Cover Page Interactive Data File (embedded within the Inline XBRL document)
*
Filed herewith
**
Certain portions of this exhibit have been omitted pursuant to a request for confidential treatment granted by, and have been filed separately with, the Securities and Exchange Commission. Also, certain exhibits and schedules to this exhibit have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to furnish a supplemental copy of any such omitted exhibit or schedule to the Securities and Exchange Commission upon request but may request confidential treatment for any exhibit or schedule so furnished.
+
Constitutes a management contract or compensation plan or arrangement.