Spinoff now out to make its mark

Windstream its only tenant now

As Communications Sales and Leasing Inc. settles into its new headquarters in Little Rock, the company is faced with a challenge: proving to investors that it can expand its business beyond its current sole tenant, Windstream Holdings Inc.

Created as a real estate investment trust through the spinoff of Windstream's fiber and copper networks, Communications Sales and Leasing, also known as CS&L, is the first of its kind to own such telecom assets. As with other nontraditional real estate investment trusts, which are on the rise, investors are watching to see how the company will drive revenue growth.

"I think everyone is waiting to see how this plays out," said James Moorman, an analyst with D.A. Davidson & Co. "You've got a different type of [real estate investment trust] structure and I think people are trying to figure them out."

It's still early for the company, which is only a few weeks old and is still moving furniture into its new headquarters on Executive Center Drive, including the missing glass top for a coffee table in Chief Executive Officer Kenny Gunderman's office.

Communications Sales and Leasing officially completed its spinoff from Windstream and became an independent, publicly traded company last month. The company's 35 employees are split between offices in Little Rock and Richmond, Va.

What makes it unique as a real estate investment trust is the type of property it owns. Traditional real estate investment trusts, also known as REITs, own commercial real estate, such as retail shopping centers and apartment complexes.

In recent years, there has been an increase in nontraditional real estate investment trusts, including trusts that own billboards, cell towers and data centers.

"We've seen kind of a wide variety of corporations decide that converting [assets] to a REIT makes sense for them," said Brian Jones, portfolio manager for Neuberger Berman Real Estate Fund.

The reasons for the conversions vary, he said. One benefit: Real estate investment trusts don't pay corporate income tax as long as they give at least 90 percent of their income to shareholders in the form of dividend payments.

The success of a nontraditional real estate investment trust depends on its ability generate a steady and sustainable cash flow that can grow and increase dividend payments for shareholders, analysts said. The rise of nontraditional trusts is making it more difficult to determine how a company will do that because of the varying types of assets.

A recent report by Jim Sullivan, managing director at Green Street Advisors, a real estate research and advisory firm, said the "primary challenge for investors will be determining the 'right' values of these newly minted REITs and assessing where they belong on the valuation spectrum compared with more familiar property types such as office buildings and malls." The report called Communications Sales and Leasing an example of a nontraditional trust.

Despite its youth, the company is looking at opportunities to expand. The company particularly wants to take advantage of the numerous copper and fiber lines that already run through the country.

Gunderman, who worked at Stephens Inc. before taking on the lead executive role, said the company wants to turn telecom assets into a "subcategory in the REIT world."

"We think there's so much opportunity out there that once we start proving the scalability of this model that others will come in and create their own REITs to do the same thing," he said this week during an interview at the company's headquarters.

Gunderman said the company is looking to acquire assets from other telephone, cable or Internet providers.

"Our customers are going to be contractually obligated to pay us," Gunderman said, adding that this will give the company "very stable, predictable underlining revenue and cash-flow stream."

Communications Sales and Leasing also will have the ability to finance projects for carriers that want to build a new network. Once the networks are established, the carrier could lease the assets from CS&L.

"For a company potentially looking to work with us, the appeal is we're able to give them very attractive capital for assets they either currently own or are looking to own and that capital is very long term in nature," Gunderman said, describing the company as a "finance partner."

The test is persuading other companies to sell their networks. Gunderman said the company has already been in talks with other companies, but declined to say how soon a potential acquisition could take place.

"We're working very, very hard at it," he said.

Business on 05/16/2015

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