Light Reading

REIT Bandwagon May Be Small

Carol Wilson
7/31/2014
50%
50%

Windstream's plan to spin off its physical assets into a REIT prompted widespread speculation Tuesday that other US telecom players might follow suit, and stock prices lifted across the board. (See Is Windstream Boldly Setting a New Trend?.)

But reality has already set in, as it now seems unlikely that many others will be able to duplicate the Windstream move after all.

As a result, stocks for AT&T Inc. (NYSE: T) and CenturyLink Inc. (NYSE: CTL) fell Wednesday, almost to pre-REIT speculation levels, and Verizon shares were actually trading below where they were on Monday. Only Frontier Communications Corp. (NYSE: FTR) still seemed to be maintaining the afterglow of Windstream Communications Inc. (NYSE: WIN)'s news.

And that might not last. Donna Jaegers, senior telecom analyst at D.A. Davidson and a veteran in this space, sees limited expansion of the strategy of spinning off physical network assets into a real estate investment trust, despite the IRS approval of the move.

"I think Windstream will get it done, but it will be interesting to see how the bond market reacts to this," Jaegers points out. "In order for this to work as a tax avoidance scheme, the bond market has to buy into it, and I don't see it as all that appealing."

One reason for the lack of appeal is that not all copper assets are equal and thus might not be sustainable in a 15-year lease such as Windstream will have with its REIT. Investors will look at the value of those networks when committing their money, just as they would evaluate the quality of real estate property in a REIT, Jaegers says.

"People are going to be asking if the economic life of those assets is really 15 years," she says.

Jaegers agrees with the general speculation that it would be much harder for an AT&T or a Verizon to pull off a deal like this because it requires state regulatory approval, and those companies tend to have a bigger footprint in the states in which they operate. They would thus face tighter scrutiny, and likely experience resistance from state officials concerned about tax revenues. Windstream's assets, though, are spread across 23 states, and they are not a dominant force in any one of them.

Even smaller companies wanting to embrace this strategy must have their debt structured in a way so that it is immediately callable, so that money raised by the REIT can be used to pay down the parent company debt without incurring substantial extra costs, Jaegers notes.

Windstream is actually getting a double benefit on the financial side from this deal, as it is not only cutting its federal tax bill but also reducing its overall dividend, from the current $1 a share to about 70 cents, combined, from the two entities that emerge -- namely Windstream, as a services company, and the REIT.

"It's a graceful way for them to cut their dividend," Jaegers says. "I think they will have more free cash flow to put back into the network to stimulate more growth."


Our NFV & the Data Center event will dig into how telecom service providers are evolving their data center strategies. Check it out and register here on Light Reading.


Windstream could still use a stronger West Coast presence than even its Paetec acquisition earned it, the analyst thinks, and will be in a much better position to make acquisitions in that space. Prior to the REIT strategy, the company didn't have a lot of room for additional debt capacity and couldn't really use its stock as currency in most deals. (See Windstream's Plan for Paetec.)

"If they can show a little better growth, their stock becomes a better currency," Jaegers notes. But this means the company has to strongly execute the strategy that CEO Jeff Gardner has laid out, increasing its sales to mid-sized enterprises, especially of cloud services and advanced networking options. (See Windstream Portal Integrates Cloud, Network, Windstream Offers Speedy Virtual Data Center Setup to Enterprises, and Windstream Makes Regional Cloud Play.)

"A lot of this comes down to whether the sales force can be effective and whether you can deliver on the products you are marketing," she concludes.

— Carol Wilson, Editor-at-Large, Light Reading

(7)  | 
Comment  | 
Print  | 
Newest First  |  Oldest First  |  Threaded View        ADD A COMMENT
mhhf1ve
50%
50%
mhhf1ve,
User Rank: Light Sabre
8/6/2014 | 4:45:00 PM
Re: That was fast
Windstream is unique for sure... but I wonder if there are any CLECs or cablecos that might try this maneuver out..? Incumbents probably won't be able to pull this off... 

 
danielcawrey
50%
50%
danielcawrey,
User Rank: Light Sabre
8/2/2014 | 7:22:20 PM
Re: That was fast
These complex real estate deals don't make a lot of sense for AT&T and/or Verizon. There's just not a really justifiable reason for it other than to spin off value.

But most big companies usually keep this kind of stuff in-house. I think that's the best way to do it instead of creating a whole new entity. 
mendyk
50%
50%
mendyk,
User Rank: Light Sabre
7/31/2014 | 3:51:24 PM
Re: That was fast
Yes -- tax avoidance schemes are almost like snowflakes.
Carol Wilson
50%
50%
Carol Wilson,
User Rank: Blogger
7/31/2014 | 3:48:11 PM
Re: That was fast
In fairness to Windstream, they didn't intend to start an industry trend. I think the reasons why this won't be widespread are pretty company-specific. 
mendyk
50%
50%
mendyk,
User Rank: Light Sabre
7/31/2014 | 3:46:28 PM
Re: That was fast
Nah -- sometimes I can hold out for days. It does remind me, though, that our previous insect overlord owner did a similar thing when it carved out its vast holdings of 20th-century media properties to focus on its high-flying events business. Its share price has actually fallen off a bit since that decision, but I'm sure it's only because investors haven't figured out yet how brilliant the move was. 
Carol Wilson
50%
50%
Carol Wilson,
User Rank: Blogger
7/31/2014 | 3:28:45 PM
Re: That was fast
Wow, you waited almost four hours before saying 'I told you so.' Is that a personal record?
mendyk
50%
50%
mendyk,
User Rank: Light Sabre
7/31/2014 | 3:21:45 PM
That was fast
Is the wind(stream) already out of the sails on this breakthrough strategy?
Flash Poll
From The Founder
Ericsson's Hyperscale Datacenter System (HDS) 8000, featuring Intel's Rack Scale Architecture, caused a stir when it was announced at MWC 2015. For more on this revolutionary product, join me on Thursday, April 30 at 12:00 p.m. EST for a Super Webinar event, A New Hardware Paradigm for the Telco Data Center.
LRTV Documentaries
Cox Eyes Cloud-Based Home Networks

4|27|15   |   05:30   |   (0) comments


Cox's Jeff Finkelstein explains how moving services to the cloud will let cable deliver services faster and eliminate constant hardware replacements.
LRTV Documentaries
CableLabs' Clarke Updates Cable Virtualization

4|23|15   |   05:41   |   (1) comment


Former BT exec now leading CableLabs' NFV and SDN efforts explains key role of open source and updates efforts to virtualize the home network.
LRTV Interviews
Ericsson's CTO Talks Transformation: Pt. II

4|23|15   |   08:19   |   (1) comment


In the second installment of an in-depth two-part interview, Ericsson's CTO Ulf Ewaldsson talks to Light Reading CEO and founder Steve Saunders about cultural change, network slicing and technology advances.
LRTV Interviews
Ericsson's CTO Talks Transformation: Pt. I

4|23|15   |   09:27   |   (3) comments


In the first installment of an in-depth two-part interview, Ericsson's CTO Ulf Ewaldsson talks to Light Reading CEO and founder Steve Saunders about the incredible transformation underway in the communications networking industry.
LRTV Documentaries
LTE Paves the Way for the 5G Revolution

4|20|15   |   4:20   |   (0) comments


Håkan Andersson, head of 5G product strategy of the Radio Business Unit at Ericsson, discusses the role of LTE, the US and other industry verticals in building a true 5G ecosystem.
LRTV Documentaries
The 3GPP's Road to 5G Standardization

4|17|15   |   4:43   |   (0) comments


Satoshi Nagata, chairman of the 3GPP's TSG-RAN group and a manager at NTT Docomo, explains the standardization process for 5G, as well as the biggest challenges and opportunities.
LRTV Documentaries
AlcaLu CTO Makes the Case for a New 5G Air Interface

4|16|15   |   3:54   |   (0) comments


Michael Peeters, CTO of wireless at Alcatel-Lucent, explains why 5G will require a new air interface to meet its diverse performance targets.
LRTV Documentaries
AlcaLu + Nokia: The New Uber-Vendor

4|15|15   |   2:42   |   (4) comments


Heavy Reading Senior Analyst Gabriel Brown discusses the technological and competitive opportunities and challenges if a merger between Alcatel-Lucent and Nokia comes to pass.
LRTV Huawei Video Resource Center
Huawei's Data Center Power Play

4|15|15   |   6:22   |   (0) comments


Huawei has developed industry-leading energy efficiency capabilities for its indoor and outdoor data center solutions, explains Dr. Fang Liangzhou, vice president of Huawei's Network Energy product Line.
LRTV Huawei Video Resource Center
Huawei’s Routers, Switches Get the Green Mark

4|15|15   |   2:02   |   (0) comments


TUV Rheinland's Frank Dudley explains how Huawei's routers and switches have been successfully tested by energy efficiency experts and have gained Green Mark Certification.
LRTV Documentaries
A Finn, a Frenchman & a Guy From New Jersey Walk Into a Merger...

4|15|15   |   3:17   |   (0) comments


Stop us if you've heard this one before... Light Reading CEO Founder & CEO Steve Saunders weighs in on the technical and cultural implications of a Nokia and Alcatel-Lucent merger.
LRTV Huawei Video Resource Center
Accounting for Better Solutions

4|10|15   |   02:31   |   (1) comment


Murad Yousuf, CTO at Saudi Arabia's Ministry of Finance (Dept. of Zakat & Income Tax), talks about the benefits of deploying router technology from Huawei.
Upcoming Live Events
May 6, 2015, Georgia World Congress, Atlanta, GA
May 12, 2015, Grand Hyatt, Denver, CO
May 13-14, 2015, The Westin Peachtree, Atlanta, GA
June 8, 2015, Chicago, IL
June 9-10, 2015, Chicago, IL
June 9, 2015, Chicago, IL
June 10, 2015, Chicago, IL
September 29-30, 2015, The Westin Grand Müchen, Munich, Germany
October 6, 2015, Westin Peachtree Plaza, Atlanta, GA
November 11-12, 2015, The Westin Peachtree Plaza, Atlanta, GA
All Upcoming Live Events
Infographics
In its latest survey covering network operators' plans and strategies for ICT transformation, Heavy Reading asked telecom operators worldwide to identify the most important goals and objectives for their ICT transformation initiatives. Heavy Reading also asked operators about the importance of a "digital first" strategy, which enables customers to complete an interaction across different digital channels, such as web and mobile self-service and social media.
Hot Topics
Comcast Formally Ends Its Bid for TWC
Mari Silbey, Independent Technology Editor, 4/24/2015
Comcast Reportedly Dropping $45B TWC Bid
Sarah Thomas, Editorial Operations Director, 4/23/2015
Adtran Is Developing White Box GPON Tech
Ray Le Maistre, Editor-in-chief, 4/24/2015
Google's WiFi-First Mobile Service 'Fi' Is Here
Dan Jones, Mobile Editor, 4/22/2015
Amazon Earnings: What to Watch For
Mitch Wagner, West Coast Bureau Chief, Light Reading, 4/23/2015
Like Us on Facebook
Twitter Feed
Webinar Archive
BETWEEN THE CEOs - Executive Interviews
Many leading communications companies can claim to have undergone significant periods of reinvention during their histories, but none have been through more major ...
Data Center Interconnect, or DCI, is one of the hottest sectors in telecom currently. Since coming back to Light Reading last year, prodigal-son style, I've ...
Cats with Phones
Learning Curve Click Here
Pierre could never remember how to use Excel.
Latest Comment