Interest in Windstream REIT Could Attract Other Telcos, Pay TV, Observers Say
Windstream’s announcement last week that it will form a publicly traded real estate investment trust (REIT) with its fiber and copper assets will likely lead other wireline companies, and possibly cable operators, to watch its implementation closely, said observers in interviews. While many telecom companies have assets that qualify for REITs, larger telcos would have a tougher time during the regulatory review processes, they said this week.
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Any provider with fixed wireline assets potentially can form a REIT, said Mike Sapien, principal analyst at Ovum. It’s a viable option for large wireline carriers, given the financial benefits, he said. “There will be increasing regulatory complexity and approval for the very large, heavily regulated carriers like AT&T and Verizon."
A REIT has “a lot of appeal,” said Frontier Communications CEO Maggie Wilderotter. “We are always looking for ways to optimize our tax structure that complement our business strategy,” she said this week during a webcast on Frontier’s Q2 earnings. Frontier will follow Windstream’s progress “and evaluate the REIT structure based on what we learned from their implementation,” she said. CenturyLink has reviewed restructuring options similar to Windstream’s REIT, a spokeswoman said, but CenturyLink hasn’t made any decisions.
The conversion process can take from 18 months to two years, said Ameek Ponda, a Sullivan Worcester attorney who designs REIT transactions. A REIT conversion is open to any company “that has a lot of real estate on its balance sheet,” he said during a conference call. It’s not a telecom industry thing, he said. “Who does this next is more about the capital markets, leverage strategies, and where they are with the ratings agencies."
Forming a REIT is tax-efficient, Ponda said. Windstream will have a tax-free spin-off, allowing Windstream to “lever up the legacy company” with a $3.2 billion debt that will be on the REIT, he said. It’s a dividend re-cap, he said. Windstream can distribute to its shareholders on a tax-free basis about $7 billion or $8 billion of value that pays them an extra $400 million of coupon each year, he said. The company can make this payment on a tax-deductible basis as though it were an interest expense, he said. The shareholders pick it up in income and they get to keep their credit rating, he said.
Larger companies like AT&T or Comcast would have to determine whether it’s the right capital markets option for them, Ponda said. They may have different and better capital markets opportunities than a REIT conversion, he said. They have some of the proper assets, but there’s always political backlash with companies of that size, he added.
The REIT proposal may trigger reviews within some state public utility commissions, though not all states where Windstream has a footprint are going to automatically participate, said Guggenheim Partners analyst Paul Gallant. “It’s going to be state-by-state” depending on current language in a state’s regulatory statutes, he said. The REIT conversion is important to Windstream, so states that do review the proposal “might be tempted” to use the review to “take a look at unbundling generally, especially if the CLECs request it,” Gallant said. Windstream anticipates the REIT conversion will “go through the customary state regulatory approval process and we are confident it will be approved,” a spokesman said.
The option could potentially interest pay-TV operators, some analysts said. It’s possible cable operators “would move cautiously on REIT conversion as well,” said Gallant. One reason is that “they have never been subject to network unbundling the way telcos have,” he said in a research note last week. There’s potential in the cable industry, Sapien said. Cable companies have fixed wireline assets “that could also be considered as eligible telecom assets for a REIT,” he said. It’s also conceivable the large utility companies could be evaluating this REIT structure based on their fixed wireline assets for power distribution, he said.
Telecom and utility companies have some real estate assets, such as transmission and distribution systems, that can be put in a REIT, said Ponda. The IRS and Treasury Department consider assets running on utility poles overhead or buried along the side of the road to be “real estate,” he said. Proposed regulations would involve whether switches and routers are real estate, he said.
Putting spectrum into a REIT may take some convincing at the agencies, Ponda said. The agencies are likely to see spectrum as removed from real estate and as “an intangible operating permit,” he said. To convince the agencies, spectrum could be explained as an easement, he said: There’s a chance to educate the agencies and explain it as an ability to “traverse the air in a geographic area” on a certain frequency, but it won’t be easy. ,