Near term resolution?

Uniti has some very big news coming soon.  Below is the timeline of events.

  • Monday November 25th court hearing on various matters including an attempt to delay the deadline to assume or reject.
  • December 6th – the deadline for WIN to assume or reject the master lease
  • December 18th – Court hearing on reclassifying the master lease as a loan. This was previously scheduled to be discussed at the November 25th hearing but has been moved back to the 18th at the request of WIN.

I have analyzed this situation to the fullest extent of my abilities and I am about to explain why I believe UNIT will come out ahead, but please take my opinion with a grain of salt.  I have no legal expertise so there could be subtleties I am missing that blow my analysis out of the water.  I choose to own UNIT myself because I believe the scenario weighted expected value is well above the market price, but there is no doubt this is a high risk stock.  An adverse court ruling could devastate UNIT’s value.  Here is my layman’s take on why that adverse ruling will not happen.

As it stands today, WIN must assume or reject the lease by December 6th.  We believe they are legally obligated to assume the lease because bankruptcy code 365 stipulates that if a lease is rejected the tenant must immediately vacate the premises.  It is impossible for WIN to vacate the asset because their status as a carrier of last resort obligates them to provide continuous 9-1-1 service to their ILEC customers.  Uniti’s assets are physically required to provide this service.

Lease assumption on Dec 6th would not be the end of the matter, as WIN would still be litigating to try to get the lease reclassified as a loan.  If successful in this endeavor, the lease (now loan) would no longer be protected by code 365 and WIN would be able to get a stay on the rent payments (now interest payments).  This stay would allow WIN to continue using the asset without paying rent.

I do not think it is likely that the lease will be reclassified.  My hunch is that the duck argument will prevail.  It looks like a lease, was written like a lease, therefore it is a lease.  There are also countless documents that refer to the lease as a lease or master lease.  It is contractual rent payments in exchange for use of real estate.

The fact that WIN delayed the hearing on lease reclassification seems to be a good sign.  If WIN thought they were going to win the reclassification, they would want it done before the assumption or rejection so they could stop paying rent as soon as possible.  The delay, in my opinion, is designed to keep the threat alive so that they can coerce UNIT into making a concession.

I believe a concession of some sort is likely and it could come at any time.  With exception to an extreme concession, we believe an agreement would be beneficial to UNIT because it would represent a resolution that would lift the cloud of uncertainty.

Resolution and clarity may be as little as a few weeks away.

On a different 2CHYP matter, we just bought MGM Growth Properties (MGP) which is similar to VICI which we owned a couple months ago.  MGP just executed a secondary offering which sent the stock down almost 5% and we see this as an opportunistic price.  MGP has a 6% current yield and a strong track record of dividend growth.  The major risk we see is tenant concentration as MGM accounts for essentially all of its revenues.  Currently, MGM is a strong tenant with excellent EBITDAR coverage of rent, but things can change in the casino industry.

Contractual rent escalators and a large pipeline of accretive acquisitions present a runway for 5%-10% annual growth going forward.  We also like the diversification benefits as MGP is a different economic exposure than any other holding in the portfolio.

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