When Windstream announced its plans to spin fiber and copper network assets out into a real estate investment trust last summer, many service providers – including Windstream – saw their stock values jump. Wall Street, initially at least, applauded the telecom REIT concept, designed to free up funding for investment by minimizing taxes – and in Windstream’s case lightening the company’s debt load.
Windstream’s plans now have received regulatory approvals and the company appears on track to complete the spinoff later this year. But Windstream stock now trades at about the same level as before the news, dropping from nearly $12 a share at the time of the news to about $9 a share today.
Are investors still feeling optimistic about Windstream’s – and the broader telecom industry’s – REIT prospects?
Telecom REIT Prospects
In the six months since Windstream announced its plans, telcos and cablecos large and small have been asked about their REIT plans and at best they’re taking a wait-and-see attitude.
CenturyLink CFO Stewart Ewing, for example, said at a recent financial conference that CenturyLink would consider the REIT idea but only after giving the separated companies some time. That would enable the industry to gauge the impact on operations and the REIT’s valuation, Ewing said. He also expressed concerns about the conditions state public utility commissions might impose on companies seeking to do REIT spinoffs.
At least one larger service provider — Verizon — has essentially rejected the REIT idea.
“The big companies view their networks as their competitive advantage,” said Stephen Sweeney, senior TMT strategist for financial firm Elevation. And with the REIT having a different management team, board of directors and shareholders, the big companies believe they could lose network control, he said.
The large telcos and cablecos apparently share this view despite various provisions Windstream has put in place for its REIT. For example, switches and routers will remain Windstream’s property, and the company will have exclusive use of the copper and fiber handed off to the REIT for 15 years, with options to renew for at least 20 more years after that.
Perhaps the REIT idea is less appealing to the larger network operators than it might be were it not for various pending mergers. Sweeney noted that the pending mergers complicate the possibility of a REIT spinoff.
He also raised a couple of other concerns.
“They haven’t created value so far,” he said of Windstream. He also noted that some traditional REITs appear to be unhappy about the telecom industry’s move into the REIT business. The telcos are so large that traditional REITs may view them as “crowding them out,” Sweeney said.
A More Optimistic View
Another financial analyst was more optimistic about service providers’ REIT prospects.
“Assuming it works I think there will be a lot of interest,” said Bernstein Research Senior Analyst Paul de Sa. De Sa’s take is that a REIT spinoff could be a comparatively easy way of creating value because it would be achieved administratively rather than operationally.
De Sa believes a lot of telcos and cablecos will ask their advisers to look into a REIT strategy for 2016.
While larger companies are more likely to create their own REITs, de Sa said smaller companies may be more open to spinning out assets into Windstream’s REIT— a possibility Windstream sees as a significant opportunity and in which the company says it has seen significant interest.