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Windstream will emerge from bankruptcy at the end of September because it is the end of quarter also.
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Uniti Group Inc. (UNIT) Presents at Bank of America Securities 2020 Media, Communications, and Entertainment Conference (Transcript)
Sep. 10, 2020 11:01 PM ETUniti Group Inc. (UNIT)
Uniti Group Inc. (NASDAQ:UNIT) Bank of America Securities 2020 Media, Communications, and Entertainment Conference September 10, 2020 11:40 AM ET
Company Participants
Mark Wallace - Chief Financial Officer
Bill DiTullio - VP of Finance and Head of IR
Conference Call Participants
David Barden - Bank of America Merrill Lynch
David Barden
All right, thank you for joining us again, I appreciate everyone staying with us, as we get into the depths of day two on our 2020 Bank of America Telco Media conference.
Right now in the session, I'm very pleased to Mark Wallace, who's Chief Financial Officer of Uniti; and Bill DiTullio, who's Vice President of Finance and Head of IR.
Thank you, guys, both for joining us, and welcome.
Mark Wallace
Dave, thanks for having us again, and I wish we could be there in person, but maybe next year.
David Barden
A lot of people are telling me they wish, they could be in L.A., although I think L.A. is 120 degrees right now. So, I'm not so sure that would be awesome, but it does have some upside. I'd like to take a moment to acknowledge the backgrounds that you guys have brought to the virtual conference. You guys really stepped up your game.
Mark Wallace
We're a high-tech company, so we'd like to demonstrate that with our background, but thank you for noticing.
Question-and-Answer Session
Q - David Barden
So look, I mean, look, we obviously have to -- we'll talk about the business, but we obviously have to talk about what we obviously have to talk about, which is, what's the latest on Windstream? I think that what we heard is you guys kind of came up with a settlement, we got room by the courts, Windstream, this restructuring got approved by the courts. You got some adjudication with respect to the lease that was kind of a condition precedent to getting to the finish line. I invited Windstream to come to the conference because they were supposed to be out of bankruptcy by now and they couldn't because they're not. So what is the latest on the Windstream saga for you guys?
Mark Wallace
Well, I think what you said is mostly right. There's been a tremendous amount of progress made the last couple of months. As you might recall, we got -- we've gotten the rerelease opinions that was an obligation for us to receive before emergence.
We completed direct finance a couple of weeks ago, so they demand investor interest on investor interest on the exit financing, so that's completed. I think now Windstream is mostly focused on just finalizing regulatory approvals and there's a few definitive documents that need to be done.
It's really more of a question for them about when they'll emerge and when everything will get wrapped. But our feeling is that, it will be relatively soon and is likely probably this month. But again, we don't have perfect information, but that's what it feels like else.
And so, I think that positions us very good going forward. We talked a lot about that at the -- some of the other conferences and in our earnings call. And I would expect within to be able to come out to bankruptcy here shortly.
David Barden
I guess it would make sense that they came out at the end of a month and probably the end of the quarter would probably be the easiest way to do it, that make sense, right?
Mark Wallace
I don't know if that's true or not. I'm not sure that really makes a difference. So, we'll just have to see.
David Barden
So I think it might be worth just in this venue kind of revisiting a little bit kind of the ten poles in the Windstream settlement that are going to kind of affect Uniti as we kind of come out of the bankruptcy. Let's just say, it's the end of September, starting in the fourth quarter and looking at 2021, there's a handful of investments and exchanges and CapEx and share issuance that's going to happen. Could you kind of run us just through that again at a high level as kind of to set the table for the conversation?
Mark Wallace
Sure. So first, kind of just to go over that try kind of some of the benefits of the settlement agreement as well. So first, as you'll recall, the master lease has been bifurcated into two leases. So, there's now CLEC lease and ILEC lease. Those are both cross guaranteed across the COVID coming out, but they had…
David Barden
How does -- what benefit does that create? Does that allow you to like to sell one and keep the other? Or is that the basic...
Mark Wallace
Yes. So, it does create optionality. I'd say mostly optionality for Windstream, which we would also -- if they decide to do something with one of those businesses. That will obviously be beneficial for us, and we would be happy to cooperate with that. I can't speak for them in terms of whether or not -- what their intents are regarding the CLEC or ILEC businesses going forward, but it does create optionality in kind of a prewires transferability of the leases should they decide to something.
David Barden
Okay, so then the second part of it.
Mark Wallace
Yes. So, the second part is, the leases are obviously much stronger than they were, going into bankruptcy given that Windstream Services, Windstream Holdings and the subsidiaries are also tenants on the leases. So they structured much stronger leases than what we had before. To your point, there are other economic aspects of the transaction from our standpoint. We've committed to fund or what we call it a GCI or growth capital improvements.
When treated as is effectively us funding, building of -- primarily own building of copper with copper with fiber networks with our fiber assets for Windstream. So, we will own those assets as they are deployed, and we will lease those assets to Windstream at an 8% Windstream. And so we've committed to fund over 10 years, $1.75 million. Pursuant to the settlement agreement, there's a certain amount that we will agree to invest each year over the 10-year period.
But I think -- and I think those are very mutually beneficial investment for us. It creates more investment in fiber assets, which is exactly what our business is, with a good initial yield on them. And for Windstream, it's certainly the intent is to make them more competitive in their markets and serving their customers. And then in addition to the three economic aspects are, there is a some obligation we have of about $400 million present value to pay to Windstream over a five year period of time. We do have prepayment options as well.
And then probably as significant as a big to us and that we've talked a lot about on our last earnings call is that, we are getting rights back to about either acquiring or getting rights back to about a little bit over $2 million fiber train miles and that has substantially increased the sales pipeline at Uniti Leasing.
And we're having very good success even though we really haven't started the marketing efforts in earnest, but we have made good success on the target marketing of those fiber strains certain customers and even responding to some reverse inquiries that we've had as well as those fiber strains.
So, we're getting quite a bit and we're expanding the amount of leasable fiber that we have quite a bit at Uniti Leasing. And then, we've got the additional investments we'll be making with Windstream over the time as well.
David Barden
Got it. And so, Windstream has going through a lot, they kind of were brought to the table with you guys to kind of revisit the lease structure and its nature, and they've kind of come to market for the benefit of their stakeholders to say that they kind of have created a $1 billion and change of value for their stakeholders by renegotiating this lease. Kenny, the CEO of Uniti has kind of said that this is a one plus one equals three kind of situation. Is there a number that you would be able to throw out there that would quantify what you think the net benefit to Uniti is from having engaged to this process?
Mark Wallace
There's not really a number I would throw out to try to quantify it. I think what you'll see here, I'm trying to outline in my opening comments, what we think the key benefits are, like I said, just to go over those again. I think the key is we have structurally stronger leases and we do have some substantially healthier stand that what we had before.
I think what Kenny said is exactly right, in terms of the GCI investments that is certainly, it's a kind of one plus one equals three, meaning that they are mutually beneficial for both our position and for Windstream position, a healthier Windstream is and the more successful they are then -- that accrues to our benefit as well.
And that's exactly what we expect to happen with these investments that we're making. So, I wouldn't try to put a number on it, but there are a number of benefits to us. And as I've said, we'll talk about the initial strains that we're acquiring as well. I'm sure as we talk more this morning, but I think those have substantial benefits to us over time as well.
David Barden
So pro forma for the settlement then, what will Windstream be as a percentage of Uniti revenue or EBITDA?
Mark Wallace
They'll still be at about -- and it's in the presentation that we posted on our website today, and I should have mentioned that. We do have an investor deck posted this morning, and anybody listening, you should read that, read the forward-looking disclaimers. But which will be about 65% of revenues, coming out of the markets and then obviously, that number will continue to go down as we continue to make further acquisitions in the future.
David Barden
And I guess to your point earlier about splitting the lease. If Windstream makes divestures and those divestitures fall into your hands and other hands, that actually accelerate diversification process as well, right?
Mark Wallace
Yes. Absolutely, though, by addition by subtraction, it -- so it's like in the extent that they wanted to and decided to sell one of those businesses and at least travel to a new tenant, that obviously, that would be a diversification benefit to us.
David Barden
And I should have mentioned, I keep forgetting to do this, but, if anyone has a question that they want me to ask or kind of try to feather into the conversation. There's a little box that down below where all our heads are. So you can kind of take questions in and I can help you get over here. So what are the topics they came up and then Bill and I have had this conversation was, you've got tenants at 65% of your business and you're going to work to diversify that down and but that tenant is going to be a private company now, not a public one.
And I think people would feel a lot more comfortable with Uniti, if they had some disclosure from Windstream, which they arguably wouldn't be obligated to give. Have you kind of talked with Windstream about kind of what level of disclosure we might be able to get for either directly from them or via you because obviously, their customers so they'll probably be typical NDA is around that kind of thought or process or on that?
Mark Wallace
So I don't know the answer to that yet. So, we obviously -- we're continue to be a public company and they're a major tenant of ours. To the extent that we're required by regulations to provide information about a major tenant that we have provisioned them the lease that will allow us to provide those disclosures.
So, we will get -- but I don't know exactly. We're working internally ourselves in with our auditors to determine exactly what those requirements are. But once we have those, I'm sure -- I expect we'll be able to tell you more about that in the future. But to the extent that we have reporting requirements from us being a public company, recovery in Windstream, we'll be able to make those disclosures.
David Barden
Yes. I guess in another way of thinking, which is kind of almost just describe it as a business unit because it's such a huge percentage of everything, you don't break out as its own thing, would be one way to think about it. Because I guess, any business, any customer over 10%, typically you have to disclose. So, all right, a couple of questions then about the settlement with respect to the fibers that you're getting and the opportunity set that you see.
I think one of the things that's always puzzles me is that, Windstream is the incumbent telecom company in this footprint and I scratch my head a little bit over how it's possible that there would be a revenue opportunity that you see that they have not been able to see. And it may be related to your, out of region, out of Windstream region customers wanting in region access and never having wanted to do business with them or something. So where does that business opportunity come from that Windstream was never able to kind of mine out?
Mark Wallace
Yes. Bill, you want to talk a little bit about the leasing pipeline?
Bill DiTullio
Yes. So Dave, so as you know, this quarter, we haven't given an update on our leasing deal pipeline and the opportunities we're seeing there. And so, our pipeline now represents about $1 billion of total contract value and that's roughly double from where it was at the end of the first quarter.
And then really the best change is, when you -- it's factoring in these strands that we're getting as part of the settlement, strands are either already owned or now have the right to lease the third parties, which we didn't have that right before or strands that we're requiring. So, the $2.2 million in total, quite honestly, we're not even out there actively marketing these strands yet because we technically as of today, we don't have the right to use them without the settlement hasn't become effective.
But nonetheless, it's out there in the marketplace that we're getting these strands. And so, I think more and more customers are now coming to a realization that we'll have the rights to these strands, and in end markets that we have several customers that are looking to have benefit of that. And we have talked about in the past that, when we've been in front our own customers with strands that we had the rights to lease to other parties such as the CenturyLink routes that we acquired a couple of years ago.
We had customers back then over the last several months. That said, hey, these limited rights to these strands that are part of the Windstream network and we would be interested. And this is before we even announced our settlement agreement with Windstream. And so, there's always been an interest in some of those routes, and I can't speak on behalf of Windstream, why not they enable to monetize those.
But based on what we're seeing in our sales pipeline, we've been able to roughly double that and about 75% of those opportunities utilized in part, at least some of those strands those strands we're getting from the Windstream settlement. That's what gives us confidence that there's a lot of opportunity there. And as we continue to work some of these opportunities in our pipeline, and again, some of them could be multiyear sales efforts and down at different stages. I think eventually, we'll have a better idea of when the ultimate lease-up potential on those strands.
David Barden
Got it. So I guess kind of moving, maybe transitioning from the kind of settlement to kind of what's next. I think that the biggest conversation around Uniti right now is, you've kind of made new commitments to put money to work for Windstream on your behalf an 8% yield.
You've got your own fiber investment capital interests and then you've got the dividend. And there seems to be this flywheel, where if you can get the Windstream settlement behind you, then you've got a stronger tenant and people feel better about the Uniti credit and that's one-half the equation, but what is the dividend thinking now?
You kind of had to cut the dividend in order to take care of some issues that came up as a result of the Windstream bankruptcy. But what is the thinking now? Does raising the dividend lower the equity cost of capital because the stock goes up? Or does it increase the equity cost of capital because it's more dollars per share. Like how does that all work from your perspective?
Mark Wallace
Yes. So look, I think a couple of things you said there are right. So I mean, keep in mind, when we talk about the capital commitment that we made to Windstream. Those are yielding investments. So they'll have a current year, 1-year after funding and at 8%. And then also keep in mind also in our other business, when we said repeatedly that CapEx spending and capital intensity in that business is coming down.
Look, on your question about the dividend, we've always had -- we kind of brought it down and I'll come back to your question specifically. Our capital allocation policy has always really been -- had three pillars to it. It's had M&A as the -- particularly with the diversification benefits. So it's M&A as one capital allocation component.
We've had organic growth, and that has traditionally been through dark fiber investments infrastructure with dark fiber builds that get you this fiber. Some of that CapEx investment is not going to be shifting over to the Uniti Leasing division in those CapEx commitments that we've made to Windstream.
And then there's been a dividend. Now, on the dividend, we currently have a dividend of about 6%. Payout ratio is probably between approximately around 45%, today. And I think those are certainly attracting relative to [indiscernible]. I think the average REIT dividend is about 3%.
I think we're the dividend under -- currently, the dividend still has to be within the constraint of our accredit agreements and particularly in the last our accredit agreements and particularly in the last note offering that we did. So if you'll remember that we operate under constraint, under our existing credit agreement and to the last bond issuance that we say. That we can only pay out 90% of taxable income until we get leverage down below 5.75% into intricate for bankruptcy. So that's where we are today. It looks like I'm sure we'll be emerging through bankruptcy shortly.
And then after that, then we'll need to -- we'll first need to have accomplished before we have flexibility consider the dividend further, then we'll need to get down at 5.75 time on leverage. I don't know exactly when we'll do that, but we want to do know exactly when we'll do that, but we want to do that opportunistically, and we're going to take into account where our cost of capital is at the time.
I would say this, on the cost of capital, it has increased substantially as we continue to take risk off the table related to Windstream. So as so it's gotten approved, it's the bankruptcy reorganization plan has been approved. As people see us make progress on steps, two more demergers and any dependent documents, re-opinions done, and then also contributing regulatory approvals to get direct financing done.
I think all those things are sort of the main key things to taking risk off and seeing our cost of capital improve. The one thing that is still outstanding that I hope to -- we'll get some clarity on soon is. What our ratings will be post Windstream purchase. And I don't have that yet. What the agencies have told us is that agencies have told us is that they would expect -- they want to issue the new ratings when Windstream has emerged from bankruptcy.
So it's clear that the emergence has, in fact, occurred. So, I haven't hoped to have clarity on that. Now, you all know, all the credit relating agencies that have indicated that we're on favorable watch for a credit ratings improvement. Certainly not willing to predict here what the ratings will be, but we are working to try to get clarity on that and get those ratings issues as Windstream emerges as well.
After that, again, back on your question about the dividend, the dividend is really more decision. So, all I can really tell you, as we think about it in terms of our overall capital allocation philosophy and strategy. And then, we also think about it in terms of some of the metrics that I mentioned previously, which would be both what the yield is on at the peer group, payout ratio list, which kind of speaks to sustainability.
And then also -- we also look the dividend to be set at out that it can grow over time as AFFO growth as well. But other than that, I think we'll have more to say about it in the future once make progress on some of these other fronts.
David Barden
Got it. And you've kind of -- and that's kind of an interesting segue to -- you've made a comment that you're comfortable that you don't need to access the capital markets this year to meet your CapEx and other commitments to Windstream as they emerge.
I think next year, with the investment that you need to make, with presuming continued capital investment in the fiber business, there will be a capital shortfall. As you think about funding that, I guess, it's going to be a conversation about, well, would you be indifferent to equity versus debt issuance debt issuance, if they were yielding the same?
Mark Wallace
Well, let me start because actually, I think what you said isn't exactly correct. So at the end of the second quarter, we added $550 million of liquidity available. What we've actually said on our last call is that, we don't have a need to raise capital both this year and next year. So our current liquidity is more than sufficient to go through all the next year. So, we really don't have any needs to raise capital, debt or equity through next year.
Now that doesn't mean that we wouldn't do so, if there was an activity in the capital markets present itself to us, so -- but we don't have a need to. And so, we have the benefit of being patient and being disciplined in terms of when we access the capital markets and what part of the market, we decide to access it, if shipping you can do.
Now from that standpoint, what we are really focused on right now from that is, as I said, trying to finalize the ratings. And then also, we do know our revolver that I mentioned on our last earnings call that, I'm focused on starting the refinancing process. Again, once Windstream emerges from bankruptcy.
David Barden
So could you kind of and I apologize, I misrepresented the statement from the second quarter. But could you kind of -- as we think about 2021, we talk a little bit about sources and uses, because I guess what we're -- I mean, we're looking at probably $530 million, $540 million of EBITDA this year, call it, maybe $550 million next year, but the CapEx is going to go up a lot. But what kind of closes the gap there? Is it just the cash on hand?
Mark Wallace
Yes. So, we haven't given guidance for 2021. So I want to say a little bit later than that. But I think some of the things that people tend to miss, as I said, we do have current liquidity to that point. I think the other thing that people didn't address is that. In terms of the leasing on the Uniti Leasing business, we generated a fair amount of cash flows just from our IRU arrangements when we do lease ups.
Because in often cases, when you are typical -- typically, when you do an IRU, you typically receive an upfront payment as a portion of the proceeds upfront. And so that's something that people tend to miss. And then, we do have other -- we're constantly working on transactions as well. So, we do have other transactions that would be cash generating.
As you know, we monetized some noncore assets in the past. And I don't think that we certainly -- we'll continue to look at monetization of non-core assets as well and there's other opportunities on the table as well. So, it's not all just capital spend and capital markets. There are certainly other opportunities to recycle assets and generate funds from other alternatives.
David Barden
Got it. And I think you've been pretty clear that when the cost of capital spiked as result of the Windstream bankruptcy, that didn't actually stop you guys kind of continue to have conversations with the marketplace in terms of deal opportunities. I imagine, since the Windstream bankruptcy, the opportunity presented itself for that to accelerate, although we had the COVID situation, which might put pump of brakes on that.
So I guess net of kind of the COVID situation, kind of business activity slowing down versus the kind of risk profile of Uniti looking much better and kind of getting a lot closer to potentially window to hit the market. Are we seeing a faster or slower deal pipeline evolution right now than we were maybe six or nine months ago?
Mark Wallace
Yes. So, I think that's a great question very timely. So I would say this. I think we've talked about during the opinion steram of the Windstream bankruptcy, we clearly -- we're focused on doing smaller transactions. We're more cautious, given what our cost of capital was given on transactions. And we're at a point, maybe a little bit of an inflection point now where that's changing.
Now, our cost of capital, I believe, still has room to improve substantially from where it is today. And certainly, the certainly, the certainly, the bottoms have improved substantially over the last few months. I think there's still room to grow up to go on both the equity and the debt. But I do think that you're going to see us a shift in where in a shift from focusing in terms of M&A deal.
Not so much on smaller bolt-on transactions, but probably a larger transactions, probably opco/propco transactions are still in the pipeline, maybe larger, more transformational opportunities as well. So getting a little bit back to where we were pre the Windstream distress situation, and really trying to focus on getting back to a normal -- a more normal pace of acquisitions, but really doing things that are really meaningful in terms of size.
Now I think that also, to the extent that we're mainly to accomplish that, then I think we're able to do and source and do good deals. I think that would also have a meaningful impact on our cost of capital as well. In terms of the pipeline itself, M&A pipeline is in good shape. As you know, most of our transaction pipeline is always proprietary, continues to be -- we've continued to nurture those conversations during the Windstream bankruptcy.
And so in COVID, from our standpoint, really hasn't had any impact on our business. Let's say, for the most part, in the business that we would be interested in acquiring, it would be heavy fiber infrastructure companies and probably would have been minimal impact on them as well. So, I think we're in good shape on the M&A acquiring, pipeline, and I think we do have pipeline, and I think we do have a shift in trend there coming out of Windstream bankruptcy process.
David Barden
So a question on that, obviously, you're value proposition to the kind of counterparties has been the ability to kind of roll forward your tax burden in this upgrade structure. Bring a capital component at usually you're value proposition to the kind of counterparties might be able to source otherwise. But do you sense at all that now that we're in kind of this weird interest rate environment where the Fed is telling us, look, we've got years of super low interest rates coming. Does that hurt Uniti's ability to convince counterparties to transact? Or does it help? Because it kind of allows your credit spread to drift even lower.
Mark Wallace
Yes. Look, I think it's -- I don't think it really has sort of I'm not seeing and has sort of I'm not seeing and we don't expect it to have any meaningful impact on us from that standpoint. Look, I mean, to your point that the treasury rates have certainly come down and they continue to go down, see would have different views on that. At same time, to your point about credit spreads, credit spreads have been pretty volatile over the last several months.
They stacked out quite a bit during the COVID crisis. They come in some, we'll kind of see where they go from here, but there are so many other aspects to know what the -- what both ours and other counterparties, cost of funds is, that 1 drifting lower in treasury rates, I don't think it's going to have any impact at all in our business.
David Barden
Okay. Good. So maybe shifting gears to the fiber services business, which is kind of like probably the more dynamic part of your operating business at the margin, a couple of questions there. Have you shared how much of that business is small cells or maybe how much of your business is small cell related?
Bill DiTullio
Yes. I'll start, Dave. So if you look at our billing MRR today, about 40% of our billing MRR is still from lit backhaul. And then other 10% to 15% that's coming from dark fiber small cells. And the remaining is most of non-wireless, remaining is non-wireless. So, that would be enterprise wholesale E-Rate, which is selling services to the schools to the early funded E-Rate program and then in government.
When you look at our backlog, and again that can change a little bit, but most of the mix there has been non-wireless and dark fiber backhaul -- sorry, dark fiber backhaul and small cell. And that's a reflection of us now focusing on leasing up our existing anchor network. So if you recall, for the last two or three years, we've been building up these very large dark fiver small cell projects, some of them were acquired or it started when we did the acquisitions, our fiber acquisitions.
And so, we've completed the majority of those larger builds, and we have about two projects remaining on those original 14 that we have been talking about, that should be wrapped up by the end of this yea
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Uniti Group Inc. (UNIT) Presents at Bank of America Securities 2020 Media, Communications, and Entertainment Conference (Transcript)
Sep. 10, 2020 11:01 PM ETUniti Group Inc. (UNIT)
Uniti Group Inc. (NASDAQ:UNIT) Bank of America Securities 2020 Media, Communications, and Entertainment Conference September 10, 2020 11:40 AM ET
Company Participants
Mark Wallace - Chief Financial Officer
Bill DiTullio - VP of Finance and Head of IR
Conference Call Participants
David Barden - Bank of America Merrill Lynch
David Barden
All right, thank you for joining us again, I appreciate everyone staying with us, as we get into the depths of day two on our 2020 Bank of America Telco Media conference.
Right now in the session, I'm very pleased to Mark Wallace, who's Chief Financial Officer of Uniti; and Bill DiTullio, who's Vice President of Finance and Head of IR.
Thank you, guys, both for joining us, and welcome.
Mark Wallace
Dave, thanks for having us again, and I wish we could be there in person, but maybe next year.
David Barden
A lot of people are telling me they wish, they could be in L.A., although I think L.A. is 120 degrees right now. So, I'm not so sure that would be awesome, but it does have some upside. I'd like to take a moment to acknowledge the backgrounds that you guys have brought to the virtual conference. You guys really stepped up your game.
Mark Wallace
We're a high-tech company, so we'd like to demonstrate that with our background, but thank you for noticing.
Question-and-Answer Session
Q - David Barden
So look, I mean, look, we obviously have to -- we'll talk about the business, but we obviously have to talk about what we obviously have to talk about, which is, what's the latest on Windstream? I think that what we heard is you guys kind of came up with a settlement, we got room by the courts, Windstream, this restructuring got approved by the courts. You got some adjudication with respect to the lease that was kind of a condition precedent to getting to the finish line. I invited Windstream to come to the conference because they were supposed to be out of bankruptcy by now and they couldn't because they're not. So what is the latest on the Windstream saga for you guys?
Mark Wallace
Well, I think what you said is mostly right. There's been a tremendous amount of progress made the last couple of months. As you might recall, we got -- we've gotten the rerelease opinions that was an obligation for us to receive before emergence.
We completed direct finance a couple of weeks ago, so they demand investor interest on investor interest on the exit financing, so that's completed. I think now Windstream is mostly focused on just finalizing regulatory approvals and there's a few definitive documents that need to be done.
It's really more of a question for them about when they'll emerge and when everything will get wrapped. But our feeling is that, it will be relatively soon and is likely probably this month. But again, we don't have perfect information, but that's what it feels like else.
And so, I think that positions us very good going forward. We talked a lot about that at the -- some of the other conferences and in our earnings call. And I would expect within to be able to come out to bankruptcy here shortly.
David Barden
I guess it would make sense that they came out at the end of a month and probably the end of the quarter would probably be the easiest way to do it, that make sense, right?
Mark Wallace
I don't know if that's true or not. I'm not sure that really makes a difference. So, we'll just have to see.
David Barden
So I think it might be worth just in this venue kind of revisiting a little bit kind of the ten poles in the Windstream settlement that are going to kind of affect Uniti as we kind of come out of the bankruptcy. Let's just say, it's the end of September, starting in the fourth quarter and looking at 2021, there's a handful of investments and exchanges and CapEx and share issuance that's going to happen. Could you kind of run us just through that again at a high level as kind of to set the table for the conversation?
Mark Wallace
Sure. So first, kind of just to go over that try kind of some of the benefits of the settlement agreement as well. So first, as you'll recall, the master lease has been bifurcated into two leases. So, there's now CLEC lease and ILEC lease. Those are both cross guaranteed across the COVID coming out, but they had…
David Barden
How does -- what benefit does that create? Does that allow you to like to sell one and keep the other? Or is that the basic...
Mark Wallace
Yes. So, it does create optionality. I'd say mostly optionality for Windstream, which we would also -- if they decide to do something with one of those businesses. That will obviously be beneficial for us, and we would be happy to cooperate with that. I can't speak for them in terms of whether or not -- what their intents are regarding the CLEC or ILEC businesses going forward, but it does create optionality in kind of a prewires transferability of the leases should they decide to something.
David Barden
Okay, so then the second part of it.
Mark Wallace
Yes. So, the second part is, the leases are obviously much stronger than they were, going into bankruptcy given that Windstream Services, Windstream Holdings and the subsidiaries are also tenants on the leases. So they structured much stronger leases than what we had before. To your point, there are other economic aspects of the transaction from our standpoint. We've committed to fund or what we call it a GCI or growth capital improvements.
When treated as is effectively us funding, building of -- primarily own building of copper with copper with fiber networks with our fiber assets for Windstream. So, we will own those assets as they are deployed, and we will lease those assets to Windstream at an 8% Windstream. And so we've committed to fund over 10 years, $1.75 million. Pursuant to the settlement agreement, there's a certain amount that we will agree to invest each year over the 10-year period.
But I think -- and I think those are very mutually beneficial investment for us. It creates more investment in fiber assets, which is exactly what our business is, with a good initial yield on them. And for Windstream, it's certainly the intent is to make them more competitive in their markets and serving their customers. And then in addition to the three economic aspects are, there is a some obligation we have of about $400 million present value to pay to Windstream over a five year period of time. We do have prepayment options as well.
And then probably as significant as a big to us and that we've talked a lot about on our last earnings call is that, we are getting rights back to about either acquiring or getting rights back to about a little bit over $2 million fiber train miles and that has substantially increased the sales pipeline at Uniti Leasing.
And we're having very good success even though we really haven't started the marketing efforts in earnest, but we have made good success on the target marketing of those fiber strains certain customers and even responding to some reverse inquiries that we've had as well as those fiber strains.
So, we're getting quite a bit and we're expanding the amount of leasable fiber that we have quite a bit at Uniti Leasing. And then, we've got the additional investments we'll be making with Windstream over the time as well.
David Barden
Got it. And so, Windstream has going through a lot, they kind of were brought to the table with you guys to kind of revisit the lease structure and its nature, and they've kind of come to market for the benefit of their stakeholders to say that they kind of have created a $1 billion and change of value for their stakeholders by renegotiating this lease. Kenny, the CEO of Uniti has kind of said that this is a one plus one equals three kind of situation. Is there a number that you would be able to throw out there that would quantify what you think the net benefit to Uniti is from having engaged to this process?
Mark Wallace
There's not really a number I would throw out to try to quantify it. I think what you'll see here, I'm trying to outline in my opening comments, what we think the key benefits are, like I said, just to go over those again. I think the key is we have structurally stronger leases and we do have some substantially healthier stand that what we had before.
I think what Kenny said is exactly right, in terms of the GCI investments that is certainly, it's a kind of one plus one equals three, meaning that they are mutually beneficial for both our position and for Windstream position, a healthier Windstream is and the more successful they are then -- that accrues to our benefit as well.
And that's exactly what we expect to happen with these investments that we're making. So, I wouldn't try to put a number on it, but there are a number of benefits to us. And as I've said, we'll talk about the initial strains that we're acquiring as well. I'm sure as we talk more this morning, but I think those have substantial benefits to us over time as well.
David Barden
So pro forma for the settlement then, what will Windstream be as a percentage of Uniti revenue or EBITDA?
Mark Wallace
They'll still be at about -- and it's in the presentation that we posted on our website today, and I should have mentioned that. We do have an investor deck posted this morning, and anybody listening, you should read that, read the forward-looking disclaimers. But which will be about 65% of revenues, coming out of the markets and then obviously, that number will continue to go down as we continue to make further acquisitions in the future.
David Barden
And I guess to your point earlier about splitting the lease. If Windstream makes divestures and those divestitures fall into your hands and other hands, that actually accelerate diversification process as well, right?
Mark Wallace
Yes. Absolutely, though, by addition by subtraction, it -- so it's like in the extent that they wanted to and decided to sell one of those businesses and at least travel to a new tenant, that obviously, that would be a diversification benefit to us.
David Barden
And I should have mentioned, I keep forgetting to do this, but, if anyone has a question that they want me to ask or kind of try to feather into the conversation. There's a little box that down below where all our heads are. So you can kind of take questions in and I can help you get over here. So what are the topics they came up and then Bill and I have had this conversation was, you've got tenants at 65% of your business and you're going to work to diversify that down and but that tenant is going to be a private company now, not a public one.
And I think people would feel a lot more comfortable with Uniti, if they had some disclosure from Windstream, which they arguably wouldn't be obligated to give. Have you kind of talked with Windstream about kind of what level of disclosure we might be able to get for either directly from them or via you because obviously, their customers so they'll probably be typical NDA is around that kind of thought or process or on that?
Mark Wallace
So I don't know the answer to that yet. So, we obviously -- we're continue to be a public company and they're a major tenant of ours. To the extent that we're required by regulations to provide information about a major tenant that we have provisioned them the lease that will allow us to provide those disclosures.
So, we will get -- but I don't know exactly. We're working internally ourselves in with our auditors to determine exactly what those requirements are. But once we have those, I'm sure -- I expect we'll be able to tell you more about that in the future. But to the extent that we have reporting requirements from us being a public company, recovery in Windstream, we'll be able to make those disclosures.
David Barden
Yes. I guess in another way of thinking, which is kind of almost just describe it as a business unit because it's such a huge percentage of everything, you don't break out as its own thing, would be one way to think about it. Because I guess, any business, any customer over 10%, typically you have to disclose. So, all right, a couple of questions then about the settlement with respect to the fibers that you're getting and the opportunity set that you see.
I think one of the things that's always puzzles me is that, Windstream is the incumbent telecom company in this footprint and I scratch my head a little bit over how it's possible that there would be a revenue opportunity that you see that they have not been able to see. And it may be related to your, out of region, out of Windstream region customers wanting in region access and never having wanted to do business with them or something. So where does that business opportunity come from that Windstream was never able to kind of mine out?
Mark Wallace
Yes. Bill, you want to talk a little bit about the leasing pipeline?
Bill DiTullio
Yes. So Dave, so as you know, this quarter, we haven't given an update on our leasing deal pipeline and the opportunities we're seeing there. And so, our pipeline now represents about $1 billion of total contract value and that's roughly double from where it was at the end of the first quarter.
And then really the best change is, when you -- it's factoring in these strands that we're getting as part of the settlement, strands are either already owned or now have the right to lease the third parties, which we didn't have that right before or strands that we're requiring. So, the $2.2 million in total, quite honestly, we're not even out there actively marketing these strands yet because we technically as of today, we don't have the right to use them without the settlement hasn't become effective.
But nonetheless, it's out there in the marketplace that we're getting these strands. And so, I think more and more customers are now coming to a realization that we'll have the rights to these strands, and in end markets that we have several customers that are looking to have benefit of that. And we have talked about in the past that, when we've been in front our own customers with strands that we had the rights to lease to other parties such as the CenturyLink routes that we acquired a couple of years ago.
We had customers back then over the last several months. That said, hey, these limited rights to these strands that are part of the Windstream network and we would be interested. And this is before we even announced our settlement agreement with Windstream. And so, there's always been an interest in some of those routes, and I can't speak on behalf of Windstream, why not they enable to monetize those.
But based on what we're seeing in our sales pipeline, we've been able to roughly double that and about 75% of those opportunities utilized in part, at least some of those strands those strands we're getting from the Windstream settlement. That's what gives us confidence that there's a lot of opportunity there. And as we continue to work some of these opportunities in our pipeline, and again, some of them could be multiyear sales efforts and down at different stages. I think eventually, we'll have a better idea of when the ultimate lease-up potential on those strands.
David Barden
Got it. So I guess kind of moving, maybe transitioning from the kind of settlement to kind of what's next. I think that the biggest conversation around Uniti right now is, you've kind of made new commitments to put money to work for Windstream on your behalf an 8% yield.
You've got your own fiber investment capital interests and then you've got the dividend. And there seems to be this flywheel, where if you can get the Windstream settlement behind you, then you've got a stronger tenant and people feel better about the Uniti credit and that's one-half the equation, but what is the dividend thinking now?
You kind of had to cut the dividend in order to take care of some issues that came up as a result of the Windstream bankruptcy. But what is the thinking now? Does raising the dividend lower the equity cost of capital because the stock goes up? Or does it increase the equity cost of capital because it's more dollars per share. Like how does that all work from your perspective?
Mark Wallace
Yes. So look, I think a couple of things you said there are right. So I mean, keep in mind, when we talk about the capital commitment that we made to Windstream. Those are yielding investments. So they'll have a current year, 1-year after funding and at 8%. And then also keep in mind also in our other business, when we said repeatedly that CapEx spending and capital intensity in that business is coming down.
Look, on your question about the dividend, we've always had -- we kind of brought it down and I'll come back to your question specifically. Our capital allocation policy has always really been -- had three pillars to it. It's had M&A as the -- particularly with the diversification benefits. So it's M&A as one capital allocation component.
We've had organic growth, and that has traditionally been through dark fiber investments infrastructure with dark fiber builds that get you this fiber. Some of that CapEx investment is not going to be shifting over to the Uniti Leasing division in those CapEx commitments that we've made to Windstream.
And then there's been a dividend. Now, on the dividend, we currently have a dividend of about 6%. Payout ratio is probably between approximately around 45%, today. And I think those are certainly attracting relative to [indiscernible]. I think the average REIT dividend is about 3%.
I think we're the dividend under -- currently, the dividend still has to be within the constraint of our accredit agreements and particularly in the last our accredit agreements and particularly in the last note offering that we did. So if you'll remember that we operate under constraint, under our existing credit agreement and to the last bond issuance that we say. That we can only pay out 90% of taxable income until we get leverage down below 5.75% into intricate for bankruptcy. So that's where we are today. It looks like I'm sure we'll be emerging through bankruptcy shortly.
And then after that, then we'll need to -- we'll first need to have accomplished before we have flexibility consider the dividend further, then we'll need to get down at 5.75 time on leverage. I don't know exactly when we'll do that, but we want to do know exactly when we'll do that, but we want to do that opportunistically, and we're going to take into account where our cost of capital is at the time.
I would say this, on the cost of capital, it has increased substantially as we continue to take risk off the table related to Windstream. So as so it's gotten approved, it's the bankruptcy reorganization plan has been approved. As people see us make progress on steps, two more demergers and any dependent documents, re-opinions done, and then also contributing regulatory approvals to get direct financing done.
I think all those things are sort of the main key things to taking risk off and seeing our cost of capital improve. The one thing that is still outstanding that I hope to -- we'll get some clarity on soon is. What our ratings will be post Windstream purchase. And I don't have that yet. What the agencies have told us is that agencies have told us is that they would expect -- they want to issue the new ratings when Windstream has emerged from bankruptcy.
So it's clear that the emergence has, in fact, occurred. So, I haven't hoped to have clarity on that. Now, you all know, all the credit relating agencies that have indicated that we're on favorable watch for a credit ratings improvement. Certainly not willing to predict here what the ratings will be, but we are working to try to get clarity on that and get those ratings issues as Windstream emerges as well.
After that, again, back on your question about the dividend, the dividend is really more decision. So, all I can really tell you, as we think about it in terms of our overall capital allocation philosophy and strategy. And then, we also think about it in terms of some of the metrics that I mentioned previously, which would be both what the yield is on at the peer group, payout ratio list, which kind of speaks to sustainability.
And then also -- we also look the dividend to be set at out that it can grow over time as AFFO growth as well. But other than that, I think we'll have more to say about it in the future once make progress on some of these other fronts.
David Barden
Got it. And you've kind of -- and that's kind of an interesting segue to -- you've made a comment that you're comfortable that you don't need to access the capital markets this year to meet your CapEx and other commitments to Windstream as they emerge.
I think next year, with the investment that you need to make, with presuming continued capital investment in the fiber business, there will be a capital shortfall. As you think about funding that, I guess, it's going to be a conversation about, well, would you be indifferent to equity versus debt issuance debt issuance, if they were yielding the same?
Mark Wallace
Well, let me start because actually, I think what you said isn't exactly correct. So at the end of the second quarter, we added $550 million of liquidity available. What we've actually said on our last call is that, we don't have a need to raise capital both this year and next year. So our current liquidity is more than sufficient to go through all the next year. So, we really don't have any needs to raise capital, debt or equity through next year.
Now that doesn't mean that we wouldn't do so, if there was an activity in the capital markets present itself to us, so -- but we don't have a need to. And so, we have the benefit of being patient and being disciplined in terms of when we access the capital markets and what part of the market, we decide to access it, if shipping you can do.
Now from that standpoint, what we are really focused on right now from that is, as I said, trying to finalize the ratings. And then also, we do know our revolver that I mentioned on our last earnings call that, I'm focused on starting the refinancing process. Again, once Windstream emerges from bankruptcy.
David Barden
So could you kind of and I apologize, I misrepresented the statement from the second quarter. But could you kind of -- as we think about 2021, we talk a little bit about sources and uses, because I guess what we're -- I mean, we're looking at probably $530 million, $540 million of EBITDA this year, call it, maybe $550 million next year, but the CapEx is going to go up a lot. But what kind of closes the gap there? Is it just the cash on hand?
Mark Wallace
Yes. So, we haven't given guidance for 2021. So I want to say a little bit later than that. But I think some of the things that people tend to miss, as I said, we do have current liquidity to that point. I think the other thing that people didn't address is that. In terms of the leasing on the Uniti Leasing business, we generated a fair amount of cash flows just from our IRU arrangements when we do lease ups.
Because in often cases, when you are typical -- typically, when you do an IRU, you typically receive an upfront payment as a portion of the proceeds upfront. And so that's something that people tend to miss. And then, we do have other -- we're constantly working on transactions as well. So, we do have other transactions that would be cash generating.
As you know, we monetized some noncore assets in the past. And I don't think that we certainly -- we'll continue to look at monetization of non-core assets as well and there's other opportunities on the table as well. So, it's not all just capital spend and capital markets. There are certainly other opportunities to recycle assets and generate funds from other alternatives.
David Barden
Got it. And I think you've been pretty clear that when the cost of capital spiked as result of the Windstream bankruptcy, that didn't actually stop you guys kind of continue to have conversations with the marketplace in terms of deal opportunities. I imagine, since the Windstream bankruptcy, the opportunity presented itself for that to accelerate, although we had the COVID situation, which might put pump of brakes on that.
So I guess net of kind of the COVID situation, kind of business activity slowing down versus the kind of risk profile of Uniti looking much better and kind of getting a lot closer to potentially window to hit the market. Are we seeing a faster or slower deal pipeline evolution right now than we were maybe six or nine months ago?
Mark Wallace
Yes. So, I think that's a great question very timely. So I would say this. I think we've talked about during the opinion steram of the Windstream bankruptcy, we clearly -- we're focused on doing smaller transactions. We're more cautious, given what our cost of capital was given on transactions. And we're at a point, maybe a little bit of an inflection point now where that's changing.
Now, our cost of capital, I believe, still has room to improve substantially from where it is today. And certainly, the certainly, the certainly, the bottoms have improved substantially over the last few months. I think there's still room to grow up to go on both the equity and the debt. But I do think that you're going to see us a shift in where in a shift from focusing in terms of M&A deal.
Not so much on smaller bolt-on transactions, but probably a larger transactions, probably opco/propco transactions are still in the pipeline, maybe larger, more transformational opportunities as well. So getting a little bit back to where we were pre the Windstream distress situation, and really trying to focus on getting back to a normal -- a more normal pace of acquisitions, but really doing things that are really meaningful in terms of size.
Now I think that also, to the extent that we're mainly to accomplish that, then I think we're able to do and source and do good deals. I think that would also have a meaningful impact on our cost of capital as well. In terms of the pipeline itself, M&A pipeline is in good shape. As you know, most of our transaction pipeline is always proprietary, continues to be -- we've continued to nurture those conversations during the Windstream bankruptcy.
And so in COVID, from our standpoint, really hasn't had any impact on our business. Let's say, for the most part, in the business that we would be interested in acquiring, it would be heavy fiber infrastructure companies and probably would have been minimal impact on them as well. So, I think we're in good shape on the M&A acquiring, pipeline, and I think we do have pipeline, and I think we do have a shift in trend there coming out of Windstream bankruptcy process.
David Barden
So a question on that, obviously, you're value proposition to the kind of counterparties has been the ability to kind of roll forward your tax burden in this upgrade structure. Bring a capital component at usually you're value proposition to the kind of counterparties might be able to source otherwise. But do you sense at all that now that we're in kind of this weird interest rate environment where the Fed is telling us, look, we've got years of super low interest rates coming. Does that hurt Uniti's ability to convince counterparties to transact? Or does it help? Because it kind of allows your credit spread to drift even lower.
Mark Wallace
Yes. Look, I think it's -- I don't think it really has sort of I'm not seeing and has sort of I'm not seeing and we don't expect it to have any meaningful impact on us from that standpoint. Look, I mean, to your point that the treasury rates have certainly come down and they continue to go down, see would have different views on that. At same time, to your point about credit spreads, credit spreads have been pretty volatile over the last several months.
They stacked out quite a bit during the COVID crisis. They come in some, we'll kind of see where they go from here, but there are so many other aspects to know what the -- what both ours and other counterparties, cost of funds is, that 1 drifting lower in treasury rates, I don't think it's going to have any impact at all in our business.
David Barden
Okay. Good. So maybe shifting gears to the fiber services business, which is kind of like probably the more dynamic part of your operating business at the margin, a couple of questions there. Have you shared how much of that business is small cells or maybe how much of your business is small cell related?
Bill DiTullio
Yes. I'll start, Dave. So if you look at our billing MRR today, about 40% of our billing MRR is still from lit backhaul. And then other 10% to 15% that's coming from dark fiber small cells. And the remaining is most of non-wireless, remaining is non-wireless. So, that would be enterprise wholesale E-Rate, which is selling services to the schools to the early funded E-Rate program and then in government.
When you look at our backlog, and again that can change a little bit, but most of the mix there has been non-wireless and dark fiber backhaul -- sorry, dark fiber backhaul and small cell. And that's a reflection of us now focusing on leasing up our existing anchor network. So if you recall, for the last two or three years, we've been building up these very large dark fiver small cell projects, some of them were acquired or it started when we did the acquisitions, our fiber acquisitions.
And so, we've completed the majority of those larger builds, and we have about two projects remaining on those original 14 that we have been talking about, that should be wrapped up by the end of this yea
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