Communications Sector

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>>> Could AT&T, Verizon Pull Off Radio Spectrum REIT?



By REINHARDT KRAUSE, INVESTOR'S BUSINESS DAILY

12/16/2014



http://news.investors.com/121614-730832-telecom-reit-conversion-taxes-radio-spectrum-impact.htm?ven=yahoocp,yahoo&src=aurlled&p=full



Will 2015 be the year of the REIT for phone companies, including perhaps Verizon and AT&T?

Converting to a real estate investment trust provides tax benefits on earnings. Most REITs own office buildings and shopping centers, but companies in other industries have sought REIT status to lower tax bills. Conversion to a REIT requires IRS approval.

Within the telecom industry, cellphone tower operators American Tower (NYSE:AMT) and Crown Castle International (NYSE:CCI) are REITs.

Telecom firms have assets they could conceivably spin off into REITs. Above is an AT&T mobile phone switching office in Charlotte, N.C.
Telecom firms have assets they could conceivably spin off into REITs. Above is an AT&T mobile phone switching office in Charlotte, N.C. View Enlarged Image

Windstream Holdings (NASDAQ:WIN), a rural-focused wireline phone company, announced plans in late July to spin off network assets into an independent, publicly traded REIT. The spinoff is expected to be completed next quarter.

Analysts have mulled whether two other rural local phone companies, CenturyLink (NYSE:CTL) and Frontier Communications (NASDAQ:FTR), could also seek REIT status.

But the biggest question is whether the nation's two phone giants, AT&T (NYSE:T) and Verizon Communications (NYSE:VZ), will spin their wireline networks or other assets into REIT holdings. Oppenheimer analyst Tim Horan, in a report, speculates that AT&T or Verizon could spin off their wireless radio spectrum assets into REIT holding companies.

Whether more phone companies take the REIT plunge could depend on "how Windstream goes in Q1," says Bernstein Research analyst Paul de Sa, referring to stock market reaction.

In a surprise, Windstream CEO Jeff Gardner stepped down on Dec. 11. Chief Financial Officer Tony Thomas, who served most recently as president of REIT operations, replaced him. Windstream says it's still committed to executing the REIT spinoff and will select a new head of REIT operations.

De Sa says that another factor in whether firms chase REIT options is "bonus depreciation" tax benefits for telecom companies. Phone companies will pay higher taxes unless Congress renews the bonus depreciation allowance, offered in 2008 to spur capital investment.

The tax break lets companies deduct half the cost of some capital equipment purchases immediately instead of over many years. The rules expired in 2013, but Congress could extend them retroactively.

Many stocks run up in anticipation of REIT announcements or after companies disclose conversion plans. Examples include lumber firm Weyerhaeuser (NYSE:WY), American Tower and Equinix (NASDAQ:EQIX), a data center operator.

Windstream stock jumped 12% when the company announced REIT plans on July 29. Phone company stocks rallied on the news. Shares of Windstream, which reported Q3 earnings that missed estimates, have since pulled back to pre-REIT-announcement levels.

Windstream plans to spin off real estate and fiber and copper network assets into a REIT, while retaining operational control through a long-term leasing arrangement that will include annual $650 million payments.

The catch for shareholders: a lower overall dividend. Windstream now pays a $1 per share annual dividend. The new Windstream would pay a 10-cent dividend, while the newly created REIT pays a 60-cent dividend.

"The deal's artful dividend cut will allow Windstream to invest more capital with the goal of returning to revenue and EBITDA growth, a key constraint of its current capital allocation practice," said bond rater Moody's in a report on potential REIT conversions among certain utilities.

Data storage firms, oil and gas companies and billboard owner CBS (NYSE:CBS) are among REIT converts.

REIT-focused exchange traded funds such as Schwab US REIT (ARCA:SCHH) and SPDR Dow Jones REIT (ARCA:RWR) have been solid in 2014.

But the specter of rising interest rate looms as the economy picks up steam. "Generalists view REITs as anathema in a rising rate environment," said a Morgan Stanley research report. Regarding a possible REIT strategy, Verizon CFO Fran Shammo said in September, "Everything is on the table."

Oppenheimer's Horan says that one REIT option might be viable as the value of radio spectrum owned by wireless phone companies swells. He speculates that AT&T or Verizon could spin off their spectrum assets into a holding company that would lease the assets back to an operating company.

"AT&T and Verizon could then shift their dividend payments into the holding company to take advantage of the REIT taxation structure," Horan said in his report.


Read More At Investor's Business Daily: http://news.investors.com/technology/121614-730832-telecom-reit-conversion-taxes-radio-spectrum-impact.htm#ixzz3No6yB1NV
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