Uniti Group's Debt And Equity Are Cheap, Just Not To Each Other

Bruder Capital, LLC profile picture
Bruder Capital, LLC
767 Followers

Summary

  • UNIT's debt and equity are paying well-above average bond and dividend yields.
  • The specialty REIT continues to rely on its former parent for the bulk of its cash flow.
  • Let's unravel the two companies to see what's rich and cheap among their securities.

Uniti Group, Inc. (NASDAQ:UNIT) is an independent, internally-managed telecom REIT which owns and leases network infrastructure. The Company's bonds provide relatively high yields, ranging from 4.50% to 5.00% on its secured notes vs. 4.43% on a bank loan ETF like the PowerShares Senior Loan Portfolio (BKLN) and from 6.35% to 6.85% on its unsecured notes vs. 5.23% on a high-yield ETF like the iShares iBoxx High Yield Fund (NYSEARCA:HYG). The UNIT common stock pays a relatively high dividend yield of 8.85% vs. other specialty REITs averaging 3.54% (e.g., the Dow Jones US Large Cap Specialty REITs Index). As shown in the graph below, the two investment classes are generally moving in tandem and, since mid-November, that direction has been mostly up on improving results and diversification:

The graph above is informative, but not a complete picture of UNIT's securities, their relative performance or where they might be headed. Filling out the rest of it requires an understanding of UNIT's relationship with its former parent. In April 2015, the Company was spun off from Windstream Holdings, Inc. (WIN) under the name Communications Sales & Leasing, Inc. Prior to the spin-off, UNIT generated $476.3 million revenue and $259.8 million Adjusted Funds From Operations (or AFFO) between April and December 2015.

In conjunction with the spin-off, WIN contributed to UNIT its Distribution Systems (fiber and copper network assets and real estate) and a small Consumer CLEC Business. In exchange for those assets, UNIT leased the Distribution Systems back to WIN under a long-term exclusive triple-net Master Lease. To finance the asset purchase, UNIT incurred $3.65 billion in long-term debt including $1.51 billion of notes and $2.14 billion of term loans under senior secured credit facilities.

Per the Summary Financial Information table below, ever since the spin-off, revenue and cash flow have been growing sequentially from

This article was written by

Bruder Capital, LLC profile picture
767 Followers
Three decades of capital markets experience: institutional trader for Lehman Brothers, M&A banker at Merrill Lynch, research, sales and trading positions at KeyBanc, RBC Capital Markets, and BNP Paribas, private equity valuation consultant for PwC.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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