Good day, ladies and gentlemen, and welcome to the Second Quarter 2015 CS&L Earnings Conference Call. My name is Cailey, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the call over to Rob Clancy, the company's Vice President of Investor Relations for opening remarks. Please go ahead, Mr. Clancy.

Thank you, Cailey. Before we start, I'd like to remind you that our discussions during this conference call will include forward-looking statements, and actual results could differ materially from those projected in these statements. The factors that could cause actual results to differ are discussed in our registration statements on Form S-11 and Form S-4 we recently filed with the SEC and in our reports on Forms 10-Q and 8-K. Discussions during the call will also include certain financial measures that were not prepared in accordance with Generally Accepted Accounting Principles. Reconciliation of those non-GAAP financial measures to the most directly comparable GAAP financial measure can be found in our current report on Form 8-K dated today. Participating in our call this morning are Kenny Gunderman, President and Chief Executive Officer; and Mark Wallace, Chief Financial Officer and Treasurer. I'll now turn the call over to Kenny.

Thank you, Rob, and good morning. Let me welcome everyone to our inaugural conference call, following our spin-off from Windstream. This morning, I will discuss our business strategy and pipeline efforts to date, and Mark will review our financial results for the second quarter. For those who may not be familiar with CS&L, we're the first communications REIT that owns the network of fiber and copper distribution systems across the United States. As you may know, Windstream, our sole customer and former parent, received a Private Letter Ruling from the IRS last year, which for the first time, deemed copper and fiber as real property. About 80% of our shares were spun out on April 24, 2015 to Windstream shareholders, and we've been a standalone public company for about 4 months. Our strategy is to diversify our assets by owning mission-critical communications network assets, including additional fiber and copper, but also data centers, coaxial towers and other related assets. We also plan to diversify our customer base by leasing these mission-critical assets to creditworthy customers over long periods of time. Our network today encompasses 3.5 million strand miles of fiber and 235,000 route miles of copper. Although these assets are leased exclusively to Windstream, our network serves over 3 million carrier, enterprise and consumer customers. We estimate that there are well over 2,000 communications technology, utilities and other companies who own or are constructing mission-critical network assets, and all represent our target universe. These companies are both large and small and publicly and privately held. Further, based upon various estimates of just the fiber and copper addressable markets alone, we believe we have less than 1% market share. This does not include the other asset class, as I mentioned, nor does it include the billions of dollars of new assets…

Thanks, Kenny. Good morning, everyone. Let me start with a couple of explanations. First, for reporting purposes, we are presenting our results in 2 business segments: our real estate leasing or REIT segment; and our Talk America, our consumer CLEC business. Also, keep in mind that our second quarter only includes 68 calendar days, post spin-off, from April 24 to quarter end, June 30. So all references to our second quarter only include that 68-day period. For the quarter, we reported FFO and AFFO of $0.48 per diluted share. Net income attributable to common shares was $8 million or $0.05 per diluted share. Weighted average common shares outstanding during the period was 149.8 million shares. Consolidated revenues were $128.7 million, with consolidated adjusted EBITDA of $122.2 million. Leasing revenues were $124.2 million, including $3.2 million of straight-line rental income. Revenues from Talk America were $4.6 million, with adjusted EBITDA of $800,000. G&A expense was $3.2 million and included $300,000 of noncash stock-based compensation expense. Reported G&A is exclusively related to our leasing segment, as all costs related to Talk America are included in our CLEC operating expense. Interest expense was $48.8 million, including the effect of the interest rate swaps we executed after the spin-off that converted our floating rate Term Loan B to a fixed rate of approximately 6.1%. Cash interest expense was $46.2 million for the period. Turning to our balance sheet. At quarter end, we had $154 million of unrestricted cash and cash equivalents and $500 million of undrawn borrowing capacity under our revolving credit facility. Our leverage ratio was 5.6x based on debt-to-annualized adjusted EBITDA and 5.3x based on net debt-to-annualized adjusted EBITDA. Earlier this week, our Board of Directors declared a regular quarterly cash dividend of $0.60 per share, payable October 15, to stockholders of record on September 30. This represents an annual dividend rate of $2.40 per share. Turning to our guidance for 2015. We expect FFO per diluted common share for the period from our spin-off to year-end to range between $1.71 to $1.73 and AFFO for the same period to range between $1.73 and $1.75 per diluted share. Our guidance does not include the impact of any acquisitions, capital market or other transaction activity. And finally, components of our non-GAAP measures are including -- are included in our earnings release this morning, and we expect to file our 10-Q by the close of business today. That concludes my prepared remarks, and I'll now turn the call over to the operator for questions.

[Operator Instructions] Our first question comes from the line of David Barden with Bank of America Merrill Lynch.

I guess, my -- the questions are kind of predictable. I guess, Kenny, can you kind -- as you look at this pipeline, give us a sense as to whether we're weeks, months or quarters away from kind of coming to some kind of conclusion on at least the first couple of deals. And then second, as you kind of -- thank you for that kind of sizing out of the pipeline. If we were looking at these kind of different types of deals, fiber, data centers or sale-leaseback versus partnering, which are the kinds of deals that are nearest in the pipeline, easiest to do versus the ones that are further out? And I guess the third question would be just with respect to the capital structure implications of -- we've seen the bonds right now. We've seen the stock go down, which raises the cost of equity. Is there anything about the size of the deals and where the cap structure is that's limiting in terms of your conversations or what you're able to accomplish?

Yes, David, it's Kenny. I'm going to ask Mark to take your third question. I'll take the first 2. But in terms of whether we're weeks, months or quarters out, we're definitely not quarters out. I think that we're -- as I've said in my prepared remarks, we're very encouraged by the pipeline, the progress. The M&A sales cycle reference is very real, and so the confidentiality of these discussions are very paramount in our minds, and the timing is somewhat unpredictable. But given that we've -- in the short period of time that we've been public, we've had opportunities that we've already passed on and we're very engaged on actionable opportunities right now, including things that are generally prerequisites to announced transactions, like signed NDAs, engaging advisers, exchanging information, doing due diligence, negotiating terms, all of those things lead us to believe that we're getting close to actionable, announce-able opportunities. So I can't say when specifically. I don't think its quarters out, but we feel very, very encouraged by the pipeline. With respect to your question, David, about the types of deals that you might see sooner, I think, as I've mentioned before and we'll certainly emphasize today, one of the things that's very appealing about our business is we have a multitude of ways that we can work with customers, and we have a multitude of assets that fit our model. And as we press forward on the pipeline, I think you're going to continue to see a good diversity of assets, a good diversity of structures in the pipeline, and in terms of timing, sequencing, it's hard to say because we feel good about many of those, and it's across different asset classes and different structures. So with that, I'll turn it over to Mark on --- to your -- the third part of your question.

Yes, so Dave, in terms of the -- our capital structure, so as you probably know, so we still have -- we have access to over excess of over $100 million of cash from our balance sheet today to put to use. We have $500 million of capacity under our revolver, which is priced at LIBOR plus $200 million today. And we can take our total debt up to 6.5x under our existing debt agreements, so we have additional debt capacity. I'd also say on the debt side, we also have alternative financing, sources available to us, so that -- on certain transactions, that might be acquisition level, portfolio level, property level, debt financing. That is very attractive as well for some transactions in our pipeline. And then last one, I'd say is on equity side, I'd say that we certainly expect our cost of capital across the entire stack is likely to improve over time as we execute on the opportunities in our pipeline.

If I could have just a quick follow-up on that. The -- in terms of the terms and conditions around deals, as we sit here and think about how to model out the rates of return you're getting on potential new deals versus the kind of cost of capital that you have, the only reference point we have is kind of the Windstream reference point, which is a good reference point, but at the same time, feels like it was kind of negotiated in a friends and family kind of way. And that maybe the opportunities for economic returns and commercially negotiated deals might be more attractive. Is that a fair statements or is the market that you're operating in gravitating to the Windstream deal also as kind of the benchmark transaction?

David, I think the first part of what you said is closer to accurate. It's hard to say definitively because we're looking at a lot of different structures, and many of those structures, types of transactions are not directly analogous to what we do with Windstream. But I do think, directionally, the first part of your comment is more accurate than the latter. We're looking at transactions that are cash flow accretive, and we have a multitude of those in our pipeline.

Our next question comes from the line of Brett Feldman with Goldman Sachs.

Just a few questions. You made an interesting comment during your prepared remarks about looking to take over the entire operations of businesses and putting it into your taxable REIT subsidiary. So I was hoping maybe you could just expand on that a little bit. And then just a question about your straight-lining. Just want to be clear. At this point, are you straight-lining the Windstream lease based on the 15-year lease term? And if so, where are you in making a decision to potentially extend that to a larger capital commitment?

So the answer on the straight line question is yes, we're currently -- we're calculating the straight line lease amount based on the initial term of 15 years, and then we would extend it whenever there's any event that calls the -- such as Windstream, asking for the optional $250 million, and that has been -- it would be extended for 5 years, then we would recalculate straight-lining rent at that time. But right now, it's on the initial 15-year period.

And Brett, on the first part of your question, as we've said all along, we absolutely would entertain acquiring entire companies and using our taxable REIT subsidiary, which as a REIT, allows us to have up to 25% of our assets in non-REIT-able assets. And given our size as a public company out of the gate, that basket is quite sizable for us, and it's not being used at all today. And we look at that as a great tool to help further our strategy and diversification, whether it be warehousing operations for a short period of time, so essentially, acquiring a company and warehousing the operations, and perhaps, selling them later or developing a platform operating business within our overall structure that we use synergistically, going forward, to look at other acquisitions. So there are many other variations, but those are 2 general ways that we're looking at it, and we're very excited about the opportunities that, that presents for us.

So just to summarize. It sounds like it would mostly be a tool or a strategy to expand around the asset side of the business. Is that the right way to think about it?

We -- I think that's right. We -- our stated strategy is to remain asset-heavy, operations-light, and so that will continue to be the case.

And is Talk America in your TRS right now or is it actually included within the REIT?

It's in the TRS.

Our next question comes from the line of Barry McCarver with Stephens.

I guess, back, first off, on the alternative financing sources, can you give us an idea of what you think your -- sort of your maximum funding level would be under some of those sources? And then just secondly, it sounds like there was no CapEx in the quarter related to Windstream, given your straight-line lease comments. Has there been any decision on funding any in the third quarter or the fourth quarter of this year?

So on the -- on your first question in terms of the limit, what we could do under the alternative financing structures, it's probably about $450 million under our debt agreements. So that would be the limit. My guess would be the rates were depending on the nature of the assets would be at kind of similar to what our secured or what our term loan Bs would trade at on a yield basis or better on those type of -- but again, it's asset-dependent. I'm then sorry, Barry, what was the second part of your question?

Just in regards to putting CapEx to the Windstream master lease agreement, the $50 million annually, you've made a decision on potentially spending some CapEx in the third quarter or the fourth quarter of this year?

Right. So we do have the $50 million commitment to provide that to Windstream as projects are completed. I don't have, in our guidance, I haven't included anything, any income related to that $50 million commitment. Solely because there's some variability around the timing when that will actually be funded, and given that it would likely be late in the year and likely to not have a material impact on the earnings this year.

All right. And then just lastly for housekeeping purposes, for the consumer CLEC revenue, do you have a pro forma, 2Q over 1Q, what the revenue decline looked like there?

2Q, I don't have that in front of me. I'd say 4, but what I can tell you, I'd say for the full year, the revenue on consumer CLEC is probably going to be between $60.5 million to $70.5 million for the -- for 2015, post spin off.

Our next question comes from the line of Simon Flannery with Morgan Stanley.

Kenny, you sort of started to touch on the criteria, financial criteria for the deals. So perhaps, you could expand on that. How are you thinking about -- when you say cash flow accretive, what exactly does that mean? Is that AFFO per share? What sort of rate return on investment you're looking for? And how also you're thinking about term escalator, some of these other things? And related to that, are we going to see 10 small deals or 3 large deals? What would your preference be in terms of how you're positioned? Because 100 deals presumably goes beyond your financial capacity at the moment if they're all converted. And then for Mark, we've obviously had a very kind of big change in the type of investors who might be interested in the company. How far through the kind of the flowback and that adjustment from a traditional RLEC investor to more of a REIT or infrastructure investor do you think we are? I know that [indiscernible] are just coming out, but your -- any sense of -- have you got your new shareholder base in place now?

Thanks, Simon. I'll just try to make sure I hit all of your first few questions, and if I miss them, let me know. But in terms of the metrics, as we're looking at opportunities, we're looking at several different baskets of criteria that are important to us. First of all, we're looking at the credit quality of our customer, of our future tenant and our variety of different metrics within that basket. We're looking at the business plan of the credit -- of the customer, the tenant, what does it look like going forward, what are the capital requirements, the cash flow coming from that business plan, and therefore, the lease coverage levels. We're looking at the lease terms, the various important data points within the lease you mentioned some of them. Clearly, we like longer-terms, 15 to 20 years, and that's generally what we're talking about in most of our discussions. We're also generally talking about more common escalators, as we would call it, so kind of in the 1%, 2% to 3% range. We like that. Another basket is the assets themselves, and we've mentioned the assets that we like. But clearly, the underlying asset's very important, and so we're considering that very heavily. So when you put all that together and you sort of -- probability weight those things, the ultimate performance or the ultimate financial metrics for us that we're focused on are clearly AFFO per share, FFO per share, and of course, just impact to the balance sheet. And in terms of levels of those -- levels of accretion of AFFO and FFO, it differs based upon the project, but we're looking at positive accretion in all those cases. And Simon, with respect to your question about the number of deals, we're -- I think if you look at our pipeline of over 100, we don't expect to do 100 deals. We don't expect all of those deals to materialize into actionable opportunities, not in the near term, at least. But I think it's very important to have a pipeline of critical mass, so that we can have actionable opportunities on a regular basis. So that was really the point of the reference to 100 opportunities. I think that you should expect to see, over time, some small deals, some mid-sized deals and some larger deals. And that's a conscious decision on our part, and I think that's how it's going to materialize over the coming months.

Yes, this is Mark. On your question regarding the shareholder base, so as you said that the reports are just coming in, so I really don't have good information on that until all the reports come in. Clearly, me and Kenny and Rob have met with a number of REIT investors over the last couple of months. And so I do expect the shareholder base to migrate towards and pick up more and more REIT investors over time. But until the reports come in, I just don't have good information to give you on that right now.

Our next question comes from the line of Eric Pan with JPMorgan.

As you talk to the ratings agencies, how much revenue diversification or tenant diversification do you think you need to lower your cost of capital at the industry level?

I would tell you, in our conversations with them, they were -- they did not give us a numeric answer to that question. They count it in terms of it needs to be significant. I would say it needs to be something -- so probably between 25% to 50%, somewhere in that range, but they don't really give a -- they haven't given us a numeric number or numeric answer.

Got it. And assume -- you get the first few out of the way, going forward, how long do you think it would take typically to consummate the average deal from initial discussions through the due diligence to the final deal announcement?

Yes, Eric, it's hard to say for sure, and I'm sorry I keep saying that, but it's dependent upon the situation. But as we've gotten further into this, I think that there are situations where we're presented with opportunities. And I think going from start to finish could be really a matter of weeks, certainly, not quarters and 30, 45, 60 days, in some situations. So others are longer gestation periods, given the complexity of a potential transaction or opportunity, particularly, those in which we're talking about partnering in M&A, for example, but in other cases, it can go much quicker than that. So...

Got it. And then lastly, are you restricted from looking only at telecom assets or can you look at other REIT-able assets from other sectors?

Eric, we can definitely look at all REIT-able assets, but we are very, very focused on telecom assets.

And our final question comes from the line of James Moorman with D.A. Davidson.

Just, one, you talked about potentially leasing an asset. So if you did something like data centers and towers, I'm sure -- I'm guessing, so it could be structures that you could run it like a typical model, where you could lease-up the towers or lease up the data centers for the margins. And then also, could you give the number of customers at the end of the quarter was for the CLEC business?

So on the first part of your question, I think it's -- we're really more focused on tripling net opportunities around towers and data centers, but there are options to lease up that we're considering. So it could be either one, but we're leaning more heavily towards triple net opportunities. And with respect to the second part of the question, Mark...

Our CLEC customers, are, I'd say, about 50,000, so...

Thank you. I'm showing no further questions at this time. I'd like to turn the call back to Kenny Gunderman for closing remarks.

Thank you. And again, in closing, I want to again express my appreciation to our lenders and investors as well as the dedicated team we have here at CS&L, both in Little Rock and in Richmond at Talk America. Our teams put forth extraordinary efforts over the last several months to launch CS&L and put us on a solid foundation for success. Thank you, all, again.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a wonderful day.