Is Windstream REIT the Beginning of a Trend?

Windstream is spinning off its fiber and copper networks and other real estate into a new real estate investment trust, and then lease use of the assets to support its communications business.

Basically, creation of the REIT allows Windstream to deleverage.

Windstream expects to retire approximately $3.2 billion of debt as part of the transaction, resulting in the company deleveraging to 3.3 times “debt to adjusted operating income before depreciation and amortization” immediately at closing.

So the new speculation is whether other larger service providers, such as Comcast, AT&T or Verizon Communications, not to mention likely candidates Frontier Communications and CenturyLink, might also take such a route.

In part, the value comes from shifting leverage to the REIT operations, thus reducing leverage for the retail operating part of the business. Also, in part, the value comes from tax benefits that should lead to higher cash flow available to the non-REIT company that remains.

The tricky part is that the core network becomes something like a master limited partnership. Are executives comfortable with that arrangement?

Such moves to spin off network assets into separate REITs are not precisely the same as creating structurally separated “network” companies. Those sorts of proposals would turn the network into a wholesale supplier of connectivity to all who wished to pay the network company for services.

U.S. telcos and cable companies traditionally have been loathe to do so. A REIT presumably would have the ability to avoid wholesale obligations greater than would have been the case under the existing arrangements.

But there would be at least some uncertainty.

Still, any chance to significantly deleverage would be helpful to most service providers looking to boost cash flow and ability to invest in strategic growth opportunities, something Windstream touts as a key benefit of its REIT move.
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