A subscriber requested updated thoughts on Uniti as it relates to the Windstream situation. I suspect this topic is top of mind for many subscribers given the persistently low price of UNIT and the seeming lack of progress toward a resolution.
Essentially, Uniti is in a state of profitable purgatory. While the delays to a resolution are annoying from the perspective of an analyst, we must remember that during this mediation process, Windstream is still paying UNIT in full. At the Goldman Sach’s conference a couple weeks ago, Kenny Gunderman (CEO of UNIT) gave some updated commentary on the matter.
“we’re a large landlord to Windstream, we’re very strategic partner to Windstream and there are a lot of moving parts to our relationship that allow us to help Windstream in ways that don’t have to hurt Uniti. And I think part of the mediation process has been our ability to help educate different creditor groups on what that means. And we’ve been pleased with that progress. And so there are ways that we can help the Windstream state, that we can help Windstream be a better tenant on the other side of bankruptcy which is important to us but at the same time, help advance our strategic goals as well.”
In my opinion, the most likely outcome is a modestly reduced rent (maybe 20%) in exchange for opening up of the fiber assets for additional tenants. Given that this fiber is less than 30% utilized presently, renting this capacity has the potential to replace or even exceed the reduced rent. The success of this strategy would depend on the level of demand for this fiber and I suspect it will be a continuous lease up rather than a single block transaction.
At this point, we are anticipating a resolution, in whatever form that takes, toward the end of the year. Windstream extended the date of affirmation/rejection into December and they cannot unilaterally extend it further. Thus, that would seem to be the time at which a deal would be reached.
There is clearly an elevated level of risk with UNIT as compared to other REITs, but I am willing to accept this risk because of the valuation. If we look at the spectrum of possible outcomes, the market is pricing in an outcome that is toward the worse end. The very worst case is not quite priced in, but the market is pricing in a bad outcome which I believe is below the weighted average outcome. There are so many moving parts here that I cannot determine what the outcome will be, but I think it is likely better than what is implied at this valuation.