DA Davidson Updates Windstream Price Target After CS&L REIT Spin

After the market close on Monday, April 27, DA Davidson analyst James Moorman released a note updating Windstream Holdings, Inc. WIN, after its 1:6 reverse split; and spin-out of "PropCo" REIT, Communications Sales & Leasing, Inc CSAL, or CS&L, when issued.

Moorman updated the Davidson price target, earnings guidance and conference call expectations for Windstream.

First, here is a recap of the Monday's trading from the point of view of a Windstream shareholder on Friday, April 24, in an attempt to "level the playing field."

Pro-Forma Share Prices - Post REIT Spin

Existing Windstream shareholders received one share of CS&L REIT "PropCo" for each five shares of WIN that they owned previously; and 1 new WIN "stub" for each 6 shares of the legacy Windstream rural telecom carrier "OpCo."

CS&L closed at $27.51, representing ~$5.50 of "old WIN" valuation, while WIN shares closed at $10.61, representing ~$1.768 per share of "old WIN" valuation.

Based upon back-of-the-envelope calculations, a combined" old valuation" would equate to ~$7.27 vs the previous close last Friday of $7.83 for an old WIN share; which appears to represent a decline of ~7.15 percent overall, after the dust settled on Monday's initial OpCo/PropCo trading session.

Related Link: Windstream's REIT Spin-Out & Stock Split: Now What?

New Dividend Yields

Based on a $2.40 annual dividend and $27.51 share price, the new CS&L REIT initial yield was ~8.7 percent; and based upon a $0.60 annual dividend, the new WIN shares are now yielding ~5.65 percent based on a close of $10.61 per new WIN share.

Davidson - Windstream Holdings: Neutral, $11 PT

The Davidson increase in share price from $8.50 to $11 reflects the 1:6 share reverse-split.

• Davidson values Windstream, "ex the REIT, at roughly 5.9x EV/EBITDA, a discount to other rural carriers due to declining revenue, but yields a similar dividend yield that other RLECs," (rural local exchange carriers).
• Davidson noted that although the new Windstream OpCo has declining revenues, and a reduced dividend yield; WIN has de-levered its balance sheet by $3.4 billion, and has a chance to invest in future growth.
• However, the WIN OpCo now has a ~$5 billion lease obligation on its balance sheet and will pay rent to CS&L of $650 million per year for the initial three years, increasing 0.5 percent annually thereafter.

Davidson - Q1 Updates & WIN Earnings Call

• Davidson expects "revenue of $1.43 billion, adjusted EBITDA of $501.2 million, and a loss per share of $0.01 for the quarter;" vs. "Thompson consensus is expecting revenue of $1.43 billion, adjusted EBITDA of $497 million, and a loss per share of $0.01."
• Davidson has also widened its expected loss per share for 2015E and 2016E to take into account the lease payments to CS&L and the number of shares outstanding.
• Davidson will be looking for management to address "some form of recovery in demand following a gradual decline in the enterprise business.
• Davidson "will also look for a sign of margin stabilization following the company's reduction in the EBITDA margin forecast to 34.0%-34.5% and 34% longer term."

The Windstream earnings release and call is scheduled for May 7, before the market opens.

Investor Takeaway

Windstream investors formerly owned shares in an S&P 500 company which was paying the highest dividend yield prior to this REIT spin.

Traditional REIT investors are attracted to high risk-adjusted yields; however, this is the first REIT which owns these type of telecom assets; and it has high-debt to enterprise value Windstream as its sole tenant.

It will be interesting to see how high of a yield investors will require in order to buy shares of the new CS&L REIT PropCo, as well as shares of the legacy rural telecom WIN OpCo.