Windstream to Spin Off Some Assets Into Publicly Traded REIT

by Lance Turner  on Tuesday, Jul. 29, 2014 6:32 am  

Jeff Gardner

Windstream Holdings Corp. of Little Rock said Tuesday that it will spin off certain assets, mainly its fiber and copper network, into a publicly traded real estate investment trust, a move it says will lower its debt by $3.2 billion but also reduce its attractive dividend by 30 percent.

"The transaction will enable Windstream to accelerate network investments, provide enhanced services to customers and maximize shareholder value," the company said in a news release. "The transaction will allow the REIT, which will own Windstream’s existing fiber and copper network and other fixed real estate assets, to expand its network and diversify its assets through acquisitions."

Windstream said customers will see no change in their rates or service as a result of the deal. It announced details in a regulatory filing and published a fact sheet on the transaction here (PDF).

CEO Jeff Gardner said the move will make the telecommunications firm "a more nimble competitor" in the marketplace. The new REIT's CEO will be Tony Thomas, who is currently Windstream's CFO. Francis X. "Skip" Frantz, a Windstream director, will become the new entity's board chairman. The REIT will have about 25 employees and raise about $3.5 billion in debt.

The spinoff will also alter Windstream's long-standing, annual $1 dividend, the sustainability of which has been questioned by analysts but which Gardner had said was prudent as recently as the May shareholders meeting. After the transaction is complete, investors will see their total dividends reduced to 70 cents per share between the two companies. Windstream will pay 10 cents; the REIT will pay 60 cents. Whether those dividends would be fully taxable was not immediately clear; the IRS ruled that about two-thirds of Windstream's 2012 dividend was not taxable because it represented a "return of capital" rather than a distribution of profit and the same was true of 51 percent of the 2013 dividend.

Windstream's $1 annual dividend has been a key selling point to investors. In a conference with analysts on Tuesday, Gardner said the new dividend makes sense given Windstream's competitive environment. He said the company thinks it struck the right balance between returning money to shareholders and retiring debt.

Shares of Windstream (NYSE: WIN) were trading up more than 19 percent on Tuesday morning to about $12.55 per share.

The Deal

Per the deal, Windstream will spin off assets including its fiber and copper networks and other real estate as a REIT, which will lease use of the assets to Windstream. The deal will happen through a "long-term triple-net exclusive lease" with an initial estimated rent payment of $650 million per year. Windstream said less than 25 percent of its assets will become part of the new REIT. The company's data centers will remain with Windstream Holdings Corp.

Publicly traded REITs sell on major exchanges and invest directly in real estate. They also receive special tax considerations and can offer investors high yields. Windstream says its REIT will distribute "at least" 90 percent of its annual taxable income as dividends to shareholders.

Windstream's board approved setting up the REIT after receiving a favorable private letter ruling from the Internal Revenue Service.

Other telecommunications companies have set up REITs using assets like cell towers and data centers. In an interview with Arkansas Business, Gardner said a REIT of this asset class — copper and fiber optics — is the first of its kind.



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