|Shares Out. (in M):||150||P/E||38||39|
|Market Cap (in $M):||3,361||P/FCF||7.8||7.8|
|Net Debt (in $M):||3,473||EBIT||0||0|
I am having a hard time getting all the charts uploaded. So for a pdf version use this link
Buy CSAL at $22.43 (10.7% dividend Yield) with a $32 price target for a total return of over 50%
Communications Sales & Leasing (CSAL), which was a spin from Windstream (WIN) in April 2015, is a REIT that is engaged in the ownership, acquisition, leasing, and funding the construction of communication distribution systems. CS&L generates revenues primarily by leasing communications distribution systems to telecommunications operators in triple-net lease arrangements, under which the tenant is primarily responsible for costs relating to the distribution systems. CS&L is the first and only REIT primarily focused on acquiring and funding the construction of communication distribution systems to lease to telecommunications operators. Currently, Windstream is CS&L’s lone tenant. Additionally, CS&L operates a small CLEC
Capital Structure & Relevant Financial Metrics
§ CSAL was formed in April, when Windstream distributed a little over 80% of CSAL shares to Windstream shareholders
- The purpose of the transaction was to create value for shareholders via financial engineering
- However, the spinoff was not received well and since the spinoff, both companies have traded down significantly, with CSAL down over 20% and WIN down over 50%
§ Both CSAL & WIN have traded down significantly since the CSAL spinoff
- Windstream, which is the source of revenues for both companies is in secular decline and reported weak 1Q numbers
- Competitors in the wireline space are also down significantly. Most notably, CTL is down 25% this year and was particularly hit following its analyst day in late June
- Odd (Unique) spinoff transaction dynamics caused there to be a huge technical selloff in the stocks of both companies, which was compounded by short sellers front running this technical
- Overhang of CSAL shares that are owned by WIN (19.6% of CSAL shares) that WIN intends to sell to pay down debt. CSAL traded down significantly following a S-11 filing that is looking to register the shares that WIN owns
§ I believe all of these reasons have provided an excellent opportunity to buy CSAL with a 10.7% dividend yield and expected price appreciation of over 40%, with additional upside upon execution of its business plan
§ The Company and Business Merits:
- CSAL is the first Telecom REIT, and owns a telecom network that is leases through a triple net lease to WIN
- The lease is a 15 year lease with renewal options, which gives CSAL a long-term lease structure
- Lease structure provides CSAL with highly predictable and steady cash flows
§ The lease is $650 million in its first 3 years and increases 0.5% each year thereafter
§ The lease rate will increase for any CAPEX that CSAL spends on the network
§ WIN EBITDA in 2014 was over $2 billion, which is approximately 3x the lease payment
§ Expected WIN EBITDAR in 2015 & 2016 is $1.756 billion and $1.665 billion, which is 2.5x the lease payment
§ New asset class (first Telecom REIT) provides CSAL with a significant first mover advantage to capitalize on the large and fragmented telecom infrastructure industry.
- There are over 700 telcos in the US, most of them small and private
- Gives telecom operators ability to monetize a portion of their business, and still operate the company
- Even at CSAL’s low valuation (relative to other REITS), the valuation gap is significant relative to where wireline telco’s trade
- Yield Analysis- What is the right yield for CSAL?
- At current yields, CSAL is trading like a “Distressed Credit”
- Despite the fact that CSAL has a “long term” lease and has a 2.5x Lease Coverage, it should trade at a discount to other REITS, since it is a new asset class with single lease tenant.
§ The average REIT sector trades at a 3.3% yield with the healthcare subsector having the highest yield trading at a 6% and the “triple net” subsectors (which CSAL is as well) trading at a 5% yield
- A somewhat comparable situation (in terms of new asset class with a single dominant tenant) would be GLPI, which currently trades at a 6.2% Dividend Yield
- When really thinking about the WIN Lease obligation, although it may be legally “subordinate” to WIN’s credit, structurally, it is “Senior Secured”, since WIN has no business without the wires.
§ Long Term Senior Unsecured WIN debt (rated B1/BB-) trades at 9.7% and its Senior Secured debt (rated Ba2/BB+) trades at under a 4% yield
§ CSAL would be able to sustain a 10% cut in their lease payment without having to cut their dividend
§ Consensus estimates for WIN (not exactly loved by Wall Street) assumes approximately a 1.4% per year deterioration in revenue through 2020. This deterioration still results in POSITIVE free cash flow for WIN (albeit very small) and therefore in no need for any type of financial restructuring (i.e., barring a material unexpected deterioration, the lease payment to CSAL is safe)
- AFFO & EBITDA Multiples
- Average REIT trades at 17.5x 2015 AFFO and 18.7x EBITDA,
§ lowest subsector (Hotels) trading at 11.7x 2015 AFFO and 12.8x EBITDA,
§ Most relevant subsector (diversified REIT’s which includes triple-net lease REIT’s) trading at 13.1x 2015 AFFO and 14.9x EBITDA,
- GLPI trades at 13.7x 2015 AFFO and 15x 2015 EBITDA
- I believe that prior to CSAL completing acquisitions, which would diversify its revenue stream and display a path for revenue growth that CSAL, should trade trade at a discount to both the entire REIT Universe and to the GLPI. I believe that it is reasonable for CSAL to trade between 7%-8% Dividend Yield, 10.5-11.x AFFO and 12-13x EBITDA which would result in a stock price between $29 and $34
Why Does This Opportunity Exist?
§ Unusual Spin transaction caused there to be a large technical overhang
- 19.6% of shares were held back by WIN, but must be sold within 1 year of the spin, creating a huge supply overhang
§ CSAL really started trading down when the S-11 was filed to register the shares that WIN owns
§ The registration process could take up to 2 months, so there probably won’t be an offering until after the summer, which continues to be a headwind for CSAL
- Although WIN spun off CSAL, ironically, due to the structure of the transaction, CSAL was the larger market cap, creating a very strange dynamic with CSAL being a mid-cap stock and WIN being a small-cap
§ Additionally, WIN was transformed into a highly speculative, highly leveraged equity
· Capitalizing its CSAL lease by 8x, WIN’s Debt / EBITDAR is 5.7x
· Every 1x turn in EBITDA = OVER $17 of stock price
· The stock is now a $550 million stub on a $10 billion capital structure
§ WIN was removed from the Mid Cap index due to its size, causing there to be large sellers of WIN stock. Although, sellers of WIN stock should have nothing to do with CSAL, they are still connected in that owners of WIN also are the owners of CSAL and the fundamentals of both are linked.
§ I believe that the large selloff in WIN shares exacerbated the CSAL selloff, with former owners on WIN looking to exit their entire post spin position.
§ As is typical in spinoffs, since WIN is a telecom company, and mostly held by investors wanting telecom exposure, investors were willing sellers of CSAL since it doesn’t fit their “telecom” bucket
§ New “asset class” has no natural buyers. This is very similar to GLPI which traded down for the first few months following their spinoff.
§ As noted earlier, CSAL also traded down due to weak operating numbers at WIN
- While a weak operating environment at WIN will most likely persist, fundamentals would have to materially deteriorate, much worse than expectations, for CSAL to be affected
Catalysts to realization of value
§ I think that the major catalyst coming will be the marketing and sale of the CSAL shares owned by WIN, in fact, the offering will be the most ideal time to buy the stock. Due to the fact that I believe that CSAL is stupid cheap with a 10.7% dividend yield, I have decided to dip my toe in early.
- Sale of shares will remove huge overhang
- Road Show and Marketing of these shares will find more traditional REIT buyers as opposed to burned telco investors
§ Acquisitions – while it will take many acquisitions to materially diversify the revenue stream away from WIN, acquisitions or sale leaseback transactions will help valuations, probably to even better than the multiples suggested above
- There are over 700 independent telco & cable companies in the US, most of them small and private. While each acquisition will be small and almost insignificant on its own, the first one that will be done will help legitimize this new asset class
§ For many of these companies, a transaction with CSAL can be the only opportunity to monetize their asset at a decent multiple with the possibility of keeping their job
§ There are even a few opportunities to immediately diversify their revenue stream
Secondary offering and marketing of CSAL shares owned by WIN
|Entry||07/09/2015 09:08 PM|
as i said in the writeup, I think that WIN will be FCF positive for 5 years. They have a wall of maturities starting late 2020, so if they if their deterioration continues or picks up, I would guess that they may run into problems refinancing the 2021 and 2022 bonds. But as far as I am concerned (with regard to CSAL) 5+ years is an eternity and much can happen prior to that to rectify the situation.
With regard to your point about CSAL having no business without WIN - that is not really true. Theoretically, CSAL can just lease out the wires to another operator (I am sure that FTR, CTL etc. would be interested in operating the asset). Obviously, that isn't an ideal situation and not the probably outcome, but I believe that the asset always wins and definitely will have the upper hand. Meaning, that I would expect in a restructuring that CSAL would take a haircut to its lease payment, but i think that their strong position as owner of the asset will allow them to dictate most of the terms
I actually think that a financial reorg here would not be that complicated. Most of the obligations of WIN are senior unsecured. They would keep whatever bank debt they have in place, keep pensions & opeb whole and probably equitize the senior unsecured debt with a slight haircut to the CSAL lease. I actually think this would be a fairly simple bankruptcy (probably a pre-pack) where they would have a pre-negotiated deal in place.
As i said in the writeup, CSAL could still maintain its current dividebt even if there were a 10% cut to the lease rate (assuming no other sources of revenues), a 20% cut would cause the dividend to be cut to approximately $1.97 a share. Even if you capitalize the $1.97 at 7% it results in over $28 a share or 20% higher than where the stock trades today
I agree with you on the difficulty in doing accretive deals at the current valuation. But a few points regarding this: 1) i view acquisitions as UPSIDE to my base case. 2) I think that deals that diversify its revenue base will still be looked at as positive - even if not accretive (and not extremely dilutive), as it will amerliorate many of the concerns that investors have. 3) the valuation discprepency between where CSAL trades now and what many of the smaller telco's can demand is huge and there are still acquisitions that can be done (albeit not extremely meaningful). I think that small acquisitions, which will not have a material effect on revenues or cash flows will prove that they can get it done. Once their price improves to my expected valuation range, they will have ample room to do almost any acquisition they want
|Subject||Follow Up Questions|
|Entry||07/14/2015 09:23 AM|
Thanks for the write up. Here are a few questions:
1. Any thoughts on where CSAL trades if a WIN bankruptcy appears likely? I agree that the stock appears cheap even if the dividend is dramatically reduced but not clear to me how the market reacts during a potential bankruptcy process.
2. My understanding is that the master lease agreement is an obligataion of WIN Inc, not an obligation of a WIN subsidiary. What practical benefit does this have in bankruptcy? Is the MLA a junior or senior claim to WIN unsecured debt? Is it conceivable that the unsecured debt holders take a haircut but that the MLA is not renegotiated?
3. Any thoughts on the timing for a CSAL acquisition? Althought the cost of equity is now high the comany's cost of debt is still low and I think the company can still do an accretive deal.
|Subject||Re: Re: 3Q 2015 Update|
|Entry||11/13/2015 03:52 PM|
Thank you, Fletch. Appreciate the update.
|Subject||Re: Re: growth in EBITDA|
|Entry||01/07/2016 11:35 AM|
Re: #13. It all depends not only on whether they do lots of deals but also whether CSAL dilutes current shareholders substantially. I doubt that they would be able to do that without dilution.
Re: #14 / positive feedback loop. I am inclined to think that the loop will start (if it will) with WIN. If WIN operations and profitability are poor and CSAL would do two mid-size deals, nobody would care much about driving CSAL part - imo (happy to be wrong on this!).
Just my two cents.
|Entry||01/07/2016 11:52 AM|
Fletch, I do not mean to hijack your thread but wanted to share this.
Here we go:
Not much discosed.
(1) acquisition multiple of EBITDA / EBITDAR
(2) duration of lease contracts
(3) how much debt does the acquired company have?
1. Issuing equity and convertible preferred at 3% does not please me given how cheap the equity is.
2. Why not issue some debt? It really depends on how much debt the target has. Maybe, it is too levered and CSAL had no choice.
Would be curious to hear others' thoughts on this.
|Subject||Re: Re: Re: Re: growth in EBITDA|
|Entry||01/07/2016 12:06 PM|
Thank you, Fletch. When I posted "First Deal", I did not see you response.
Good point re: 2017 Refy / Paydown of WIN bonds as a potential catalyst (provided that WIN's operations do not suffer).
I agree that diversification is probably more important than small dilution but the latter would have a sizable impact on final returns of CSAL shareholders.
|Entry||02/08/2016 06:43 PM|
Fletch, any thoughts on why CSAL is down nearly 9% today on high volume?