The announcement that Windstream has been cleared by the IRS to spin off its telecommunications network assets into an independent, publicly traded real estate investment trust (REIT) has created a tremendous buzz, as well as some backlash.
The transaction will allow the REIT, which will own Windstream’s existing fiber and copper network and other fixed real estate assets, to operate tax-free. Windstream will lease back capacity from the REIT for $650 million annually.
Jeff Gardner, president and CEO of Windstream, said the REIT transaction will make the company a “more nimble competitor.” Nimble indeed.
The tax-free spinoff will enable Windstream to lower its debt by $3.2 billion and increase free cash flow to accelerate broadband investments. As a result, it will expand availability of 10 Mbps Internet service to more than 80 percent of its customers and more than double the availability of 24 Mbps Internet service by 2018, expanding to more than 30 percent of its customers.
The deal has the potential of being a game changer for telecom and data carriers, possibly portending the spinoffs of REITs at AT&T and Verizon Communications, according to Jon C. Ogg, reporter, 24/7 Wall Street. But there are some in Congress who think the growth of REITs threatens the nation’s tax base and may propose legislation to rein them in.
The tower industry is well versed in the advantages of REIT status. American Tower began functioning as a REIT at the beginning of 2012; Crown Castle International attained REIT status at the beginning of 2014. Both companies now pay out 90 percent of their earnings through dividends.
The number of REITs in the United States has grown from 136 in 2008 to 209 so far in 2014, according to the National Association of Real Estate Investment Trusts.