REITs Gain Momentum in Telecom Industry

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January 1, 2012 American Tower Corporation began operating as a REIT and is now the second largest REIT, with Crown Castle following closely as the fourth largest REIT after the company converted to REIT status at the beginning of 2014. “REITs don’t pay federal income taxes with the understanding that they distribute at least 90 percent of taxable earnings to shareholders as dividends. The structure has become a popular tool to improve returns for investors and lower taxes,” Bloomberg explained. While it’s been assumed that SBA Communications will follow suit, the company has said during multiple earnings calls that the operating results they were reporting would not have been achieved had they converted to a REIT. These tower companies aren’t the only ones in the telecom industry that have floated the idea of becoming a REIT. The most recent company to become a publicly traded real estate investment trust is Windstream Communications, a provider of voice and data network communications, who has decided to spin its fiber and copper networks, as well as other real estate, into a REIT.

Windstream took telecom analysts by surprise then the IRS announced that the Private Letter Ruling had been approved, when no one had been aware of the filing. Cam Cosby of Hogan Lovells LLP explained, “WIN flew under the radar with Private Letter Ruling. The PLR is a confidential filing. You submit a request to the IRS then the IRS makes them public on a redacted basis 3-6 months after the ruling. In the normal course, they’ll all be made public but it’s the company’s choice whether they disclose the original filing.” Jennifer Fritzsche, Senior Analyst at Wells Fargo, explained that investors were surprised because in May 2014, the IRS updated its definition of “real property,” which provided more detail on “transmission-like” assets, where fiber optic and copper lines seemed to fit.

A few weeks ago, the Boston Globe reported that a Republican leader in the House of Representatives wants to block the rush to form REITs, and has drafted legislation that could possibly disqualify tower companies as REITs. However the May 2014 clarification by the IRS states, “a special use permit that a REIT receives from government to place a cell tower on federal government land is determined to be in the nature of a leasehold and therefore in an interest in real property.” However if this legislation gains approval in the House, cell phone towers could possibly become disqualified as the IRS changes their stance on the definition of “real property.” This might be why tower companies have been snatching up ground leases under their towers. Jay Brown, CFO of Crown Castle reported that last quarter they, “purchased land beneath 125 of our towers during the quarter. Today approximately 1/3 of our site rental gross margin is generated from towers on land we own, and approximately 70% on land we own or lease for more than 20 years. Where we have ground leases, the average term remaining on our ground leases is approximately 29 years. Since we began this important effort, we have completed over 16,000 individual land transactions. Our proactive approach to achieving long-term control of the ground beneath our sites is core to our business as we look to control our largest operating expense.”

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