& cplSiteName &

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. (Nasdaq: 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.
cnwedit
50%
50%
cnwedit,
User Rank: Light Beer
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. 
cnwedit
50%
50%
cnwedit,
User Rank: Light Beer
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?
From The Founder
Following a recent board meeting, the New IP Agency (NIA) has a new strategy to help accelerate the adoption of NFV capabilities, explains the Agency's Founder and Secretary, Steve Saunders.
Flash Poll
Live Streaming Video
Charting the CSP's Future
Six different communications service providers join to debate their visions of the future CSP, following a landmark presentation from AT&T on its massive virtualization efforts and a look back on where the telecom industry has been and where it's going from two industry veterans.
LRTV Interviews
CenturyLink: Are We All Security Service Providers Now?

5|29|17   |   3:40   |   (2) comments


As the security environment gets more threatening, in the wake of WannaCry and other attacks, service providers need to shoulder more responsibility for securing networks, says Tim Kelleher, vice president for IT security services at CenturyLink, in an interview at the Light Reading Big Communications ...
LRTV Documentaries
Verizon's Ed Chan on the New World for Networks

5|29|17   |   19:08   |   (0) comments


In this 2017 Big Communications Event keynote, Ed Chan Senior Vice President, Technology, Strategy and Planning, Corporate Networking and Technology, Verizon, discusses the coming world of sensors and the smart edge, powered by new spectrum and faster fiber uploads. For more BCE coverage and videos,
LRTV Interviews
Zayo's CTO: Respect the Infrastructure!

5|29|17   |   3:04   |   (0) comments


At Light Reading's Big Communications Event in Austin, Texas, Zayo's CTO Jack Waters talked about infrastructure and the changing customer landscape for network providers. While everyone else is chatting up applications and services, Waters urges the industry not to downplay the role that ...
LRTV Interviews
AT&T: Creating Dynamic Networks to Meet Business Needs

5|26|17   |   4:24   |   (0) comments


As enterprises need more dynamic networks, service providers need to deliver on-demand, virtual services to meet those needs. AT&T is creating a networking fabric to mix-and-match SDN technologies for enterprise customers, says Roman Pacewicz, AT&T senior vice president for offer management and service integration, in an interview at Light Reading's
LRTV Interviews
EdgeConneX on Industry Headwinds & Tailwinds

5|26|17   |   2:41   |   (0) comments


At Light Reading's Big Communications Event 2017, EdgeConneX CTO Don MacNeil discussed the value of partnerships in the digital world.
LRTV Documentaries
4 Steps Toward a Higher Network IQ

5|26|17   |     |   (0) comments


At the Big Communications Event in Austin, Texas, EXFO CEO Philippe Morin explains how sensors and analytics can boost a network's intelligence and enable on-demand customer experiences. Find more BCE 2017 coverage here.
LRTV Interviews
BT's McRae Sheds Light on 4K Strategy

5|25|17   |   4:45   |   (0) comments


At Light Reading's Big Communications Event 2017 in Austin, Texas, BT Group's Chief Network Architect Neil McRae talks about what it took for BT to broadcast live sports in 4K. Catch up with all our BCE coverage at http://www.lightreading.com/bce.asp.
From the Founder
How the NIA Aims to Advance NFV

5|25|17   |   08:07   |   (1) comment


Following a recent board meeting, the New IP Agency (NIA) has a new strategy to help accelerate the adoption of NFV capabilities, explains the Agency's Founder and Secretary, Steve Saunders.
LRTV Custom TV
Better Solutions That Address Growing Scale

5|25|17   |     |   (0) comments


For Comcast, the X1 rollout and 17-fold increases in broadband speeds in the past 16 years are among factors driving the need for Energy 2020 solutions that reduce cost and consumption, says Mark Hess.
LRTV Custom TV
Ethernity Network Delivers Instant Offloading of Network Functions With All-Programmable Intelligent NIC

5|25|17   |     |   (0) comments


David Levi, CEO of Ethernity Networks, explains that programmability of the hardware makes the company's All-Programmable Intelligent NIC uniquely beneficial for communications service providers that need advanced data appliances with agile support of virtualization. Utilizing the company's patented network processing technology, Ethernity offers data path ...
LRTV Documentaries
BCE 2017: Vodafone Gets Obsessed With Cloud-Native

5|25|17   |     |   (0) comments


Vodafone's Matt Beal updates us on Project Ocean and explains why simple virtualization isn't enough of a goal for network transformation. Catch up with other BCE 2017 keynotes and news at http://www.lightreading.com/bce.asp.
LRTV Documentaries
BCE 2017: Intel's Take on Network Transformation

5|24|17   |     |   (0) comments


In this BCE 2017 keynote, Lynn Comp discusses Intel's vision for areas such as analytics, automation and service assurance. For more videos and BCE coverage, see http://www.lightreading.com/bce.asp.
Infographics
With the mobile ecosystem becoming increasingly vulnerable to security threats, AdaptiveMobile has laid out some of the key considerations for the wireless community.
Hot Topics
Cities Clamor for More Clout at FCC
Mari Silbey, Senior Editor, Cable/Video, 5/23/2017
Sonus & Genband Finally Combine to Form $745M Company
Dan Jones, Mobile Editor, 5/23/2017
NB-IoT? Not at Those Prices, Say DT Customers
Iain Morris, News Editor, 5/26/2017
Like Us on Facebook
Twitter Feed
BETWEEN THE CEOs - Executive Interviews
One of the nice bits of my job (other than the teeny tiny salary, obviously) is that I get to pick and choose who I interview for this slot on the Light Reading home ...
TEOCO Founder and CEO Atul Jain talks to Light Reading Founder and CEO Steve Saunders about the challenges around cost control and service monetization in the mobile and IoT sectors.
Animals with Phones
What Brogrammers Look Like to the Rest of Us Click Here
Live Digital Audio

Playing it safe can only get you so far. Sometimes the biggest bets have the biggest payouts, and that is true in your career as well. For this radio show, Caroline Chan, general manager of the 5G Infrastructure Division of the Network Platform Group at Intel, will share her own personal story of how she successfully took big bets to build a successful career, as well as offer advice on how you can do the same. We’ll cover everything from how to overcome fear and manage risk, how to be prepared for where technology is going in the future and how to structure your career in a way to ensure you keep progressing. Chan, a seasoned telecom veteran and effective risk taker herself, will also leave plenty of time to answer all your questions live on the air.