Windstream's move last week to spin off/lease back its network and copper into a REIT certainly shook things up last week. Monday's poll shows quite clearly that folks in the industry have diverging views on what it all means. There are definitely unresolved questions out there, at least for me. Let's ramble on about a few of them:
- Multiple tenants - There has been talk of Windstream's fiber REIT becoming a wholesaler with multiple tenants. But it's unclear to me there is anything left to lease out, since Windstream-proper is paying what seems to be a flat fee to lease it all back as infrastructure, not as capacity, and will be doing the actual operating and provisioning and all that. It's hard to envision an outside party coming in to lease Windstream fiber or copper and having the experience be any different post-REIT as compared to now. So when we speak of multiple tenants, I think it's more likely we're talking about multiple assets each with its own tenant, which leads us to...
- M&A - I don't think Windstream's network REIT is going to start throwing money at 10x or higher multiples at fiber assets. But I do think this could become a convenient receptacle that other ILECs might use. Rather than transform their network assets into a REIT, smaller ILECs and RLECs could sell to and lease back their assets from Windstream's REIT in exchange for, say, an ownership stake. I think if AT&T, Verizon, or CenturyLink want to pursue the REIT route they'll surely roll their own. But others with less extensive legal and tax resources may find a network REIT resource pool attractive. Heck, even CLEC or managed services entities out there like EarthLink might consider such a thing. And Sprint, hmmm... now there's a thought that will require some further, err, thought.
- Operational impact - One big question here is just how independent an entity would this REIT be from Windstream? We just don't have enough information, but the one bit we do have is that it would have just 25 or so employees initially. That tells me this really isn't about operations to Windstream, i.e. that the taxes and the balance sheet are key to them. Thus they probably intend to keep the REIT on a very tight leash via the terms of that lease.
- Repercussions - While I doubt Windstream's REIT move will itself change things all that much, the fact is that network infrastructure and a real estate model make sense. At least, they do when it comes to dark fiber, conduit, and perhaps legacy copper too. We see that in the way Zayo has always viewed and operated its dark fiber unit differently from the other pieces of its business. We see it in the way Allied Fiber has structured its whole buildout down in Florida. Neither has taken the REIT path yet, but then neither has a problem with taxes eating into profits either at present. Others may, and each one that does will put its own twist on the fiber REIT, and that's going to be fascinating to watch.
Feel free to chime in further in the comments below.