& 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. (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?
From The Founder
The independent evaluation of Nokia's key virtual network functions (VNFs) was a defining moment for the Finnish giant.
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 Custom TV
Cisco's Innovations in Cable

5|26|16   |   03:18   |   (0) comments


Marc Aldrich from Cisco discusses the latest in security, the evolution and momentum for CCAP and what the industry will be seeing next from Cisco.
LRTV Documentaries
Leading Lights 2016 Highlights

5|25|16   |   02:26   |   (1) comment


Some of the high points from this year's Leading Lights awards dinner at the Hotel Ella in Austin, Texas.
LRTV Documentaries
Light Reading Hall of Fame 2016

5|23|16   |   05:43   |   (0) comments


Find out who has been welcomed into Light Reading's Hall of Fame this year.
LRTV Custom TV
ZTE TM Forum Highlights

5|23|16   |     |   (0) comments


ZTE showcased its new ICT solutions at TM Forum in Nice.
LRTV Interviews
Gamma's MD on the Emergence of UC2

5|20|16   |     |   (0) comments


Gamma Communications Managing Director David Macfarlane believes the unified communications (UC) market has reached a tipping point.
LRTV Custom TV
The Ultimate 5-Minute Guide to Digital Customer Engagement

5|20|16   |     |   (0) comments


In this short video, you will hear all about how Digital Customer Engagement is the key to meeting customer expectations, keeping them happy, and maximizing revenue. VP Product & Marketing at Pontis, Ofer Razon, breaks down for us the five essential capabilities for successful Digital Customer Engagement. Don’t miss!
LRTV Custom TV
NFV in 2016: Part 1 – NFV Use Cases Get Real

5|19|16   |   05:57   |   (0) comments


Consensus is building around the key use cases for NFV, including managed IP services at the network edge and on customer premises, which can generate new revenues from enterprises/SMBs and consumers; Evolved Packet Core to support LTE migration; and adjacent technologies, such as TAS and IMS, to support VoLTE and next-generation charging and policy control ...
LRTV Custom TV
Nokia's Steve Vogelsang on NFV – Part 3

5|19|16   |     |   (0) comments


Steve Vogelsang discusses the challenges of operational transformation and how Nokia helps its customers. Join Steve at the Big Communications Event in Austin the morning of May 24, on his keynote and optical networking panel.
LRTV Interviews
Level 3: Why UC Is In Demand

5|17|16   |   04:12   |   (1) comment


Andrew Edison, Level 3's senior VP of sales, EMEA region, talks about the drivers of growth in the unified communications services market.
LRTV Custom TV
ARM's OPNFV Action

5|17|16   |     |   (0) comments


At the ARM booth at MWC 2016, Joe Kidder and Bob Monkman speak to Light Reading about OPNFV and their upcoming action.
LRTV Custom TV
Nokia's Steve Vogelsang on NFV – Part 2

5|16|16   |     |   (0) comments


Steve Vogelsang gives advice to service providers on how to move to NFV. Join Steve at the Big Communications Event in Austin the morning of May 24, on his keynote and optical networking panel.
LRTV Interviews
Interoute CTO on NFV's Maturity

5|13|16   |   06:46   |   (1) comment


Matt Finnie, CTO at international operator Interoute, explains how NFV has made life easier in terms of logistics and how Interoute can now enable a 'software-defined moment' for its customers.
Upcoming Live Events
September 13-14, 2016, The Curtis Hotel, Denver, CO
December 6-8, 2016,
June 16-18, 2017, Austin Convention Center, Austin, TX
All Upcoming Live Events
Infographics
A new survey conducted by Heavy Reading and TM Forum shows that CSPs around the world see the move to digital operations as a necessary part of their overall virtualization strategies.
Hot Topics
DT: Telcos Must Escape Vendor Prison
Iain Morris, News Editor, 5/24/2016
AT&T to Start 5G 'Friendly' Trial by 2016 End
Dan Jones, Mobile Editor, 5/24/2016
Cisco's Patel Hails 'Microculture' Successes
Iain Morris, News Editor, 5/26/2016
Cable Is Eyeing Its Retail Options
Mari Silbey, Senior Editor, Cable/Video, 5/25/2016
AT&T's Margaret Chiosi Retires
Ray Le Maistre, Editor-in-chief, 5/25/2016
Like Us on Facebook
Twitter Feed
BETWEEN THE CEOs - Executive Interviews
In this latest installment of the CEO Chat series, Craig Labovitz, co-founder and CEO of Deepfield, sits down with Light Reading's Steve Saunders in Light Reading's New York City office to discuss how Deepfield fits in with the big data trend and more.
Grant van Rooyen, president and CEO of Cologix, sits down with Steve Saunders, founder and CEO of Light Reading, in the vendor's New Jersey facility to offer an inside look at the company's success story and discuss the importance of security in the telecom industry.
Animals with Phones
Live Digital Audio

Our world has evolved through innovation from the Industrial Revolution of the 1740s to the information age, and it is now entering the Fourth Industrial Revolution, driven by technology. Technology is driving a paradigm shift in the way digital solutions deliver a connected world, changing the way we live, communicate and provide solutions. It can have a powerful impact on how we tackle some of the world’s most pressing problems. In this radio show, Caroline Dowling, President of Communications Infrastructure & Enterprise Computing at Flex, will join Women in Comms Director Sarah Thomas to discuss the impact technology has on society and how it can be a game-changer across the globe; improving lives and creating a smarter world. Dowling, a Cork, Ireland, native and graduate of Harvard Business School's Advanced Management Program, will also discuss her experience managing an international team focused on innovation in an age of high-speed change.