By Jen Koester, an insider at Lease Advisors.
Windstream Holdings, Inc. has plans to convert its copper, fiber and other fixed real estate assets into an independently publicly traded real estate investment trust, otherwise known as REIT. With the IRS’s approval, Windstream will be able to save around $100 million a year in income taxes, which will significantly reduce its current debt. You may be wondering, what exactly is a REIT?
REITs are tax-favored entities that Congress created to in order to provide people with a method of investing in real estate that produces income, similarly to investing in a mutual fund. REITs are growing in popularity because investors who cannot afford to invest in real estate on their own can do so by owning shares of REIT. As a testament to their growing popularity, in 1971 there were only 34 REITs valued at $1.5 billion. Now, there are over 200 REITs worth approximately $816 billion. At first, the connection between REITs and cell towers may not be obvious. Tower company, American Tower received a ruling from the IRS, similar to that of Windstream, that helped converted their assets into a REIT. Now, American Tower’s cell towers, along with the copper and fiber that make them, can be converted to REITs. According to Steven Rosenthal, a senior fellow at the Tax Policy Center, copper and fiber assets can be qualified as real estate because they are stationary and earn income.
REITs have the potential to greatly benefit cellular companies. Not only can REITs reduce income taxes, but they also have the potential to raise capital by leasing the assets (i.e. copper and fiber) back to the cellular company. However, analysts have mixed feelings over the effectiveness of REITs. When Windstream’s stock rose 12%, Timothy Horan at Oppenheimer wrote that “[we] believe this means that every network stock we cover is roughly 20% undervalued at this point, as they should be able to largely avoid paying taxes going forward.” On the other hand, analysts at CitiBank and Moody’s think Windstream’s transformation will weaken both the company and their REITs by spreading themselves too thin.
It is still unknown if REITs are the way to go for cellular companies. Although REITs have the potential to help companies decrease their debt, they also have the ability to make companies seem “un-American” because of how they reduce taxes. Currently it is speculated that smaller carriers will move forward with REIT to help fund their growth, while larger companies will resort to other methods.
Reader Interactions