5 Things Communications Sales & Leasing Inc.'s Management Wants You to Know

Check out what CEO Kenny Gunderman had to say about CS&L's growth opportunities, the current business structure, and much more.

Anders Bylund
Anders Bylund
Aug 26, 2015 at 7:00PM
Technology and Telecom

Source: CS&L.

Communications Sales & Leasing (NASDAQ:CSAL) has reported its first quarterly results as a stand-alone company. In a move closely watched by other telecoms around the nation, the communications equipment assets REIT spun out from parent company Windstream Holdings (NASDAQ:WIN) near the end of April.

Despite a lack of official guidance or even analyst estimates, it's fair to say that investors liked what they saw in CS&L's second-quarter report. The company started out with adjusted funds from operations of $0.48 per share on total sales of $129 million. Windstream was CS&L's only customer in this quarter. Later that day, CS&L shares rose 4.7% on the news and Windstream's stock jumped 6.9%.

But the numbers never tell the whole story. Like most public companies, CS&L's management also held a conference call with analysts right after the earnings release. There, the company shared more detail on its operations, as well as a clearer picture of the road ahead.

Here are five of the most important, interesting, or informative statements made by CEO Kenny GundermanĀ in that call.

CS&L in a nutshell

We are the first communications REIT that owns a network of fiber and copper distribution systems across the United States. As you may know, Windstream -- our sole customer and former parent -- received a private letter ruling from the IRS last year which for the first time deemed copper and fiber as real property. About 80% of our shares were spun out on April 24, 2015 to Windstream shareholders, and we have been a stand-alone public company for about four months.

That's CS&L's entire backstory in two sentences. Gunderman just explained how treating copper and fiber assets as REIT-managed real estate properties broke new ground and how the company's ownership structure works today.

For the record, Windstream has committed to selling all of its CS&L holdings before April, 2017. Any gains from these sales would be taxable after that point, giving Windstream plenty of incentive to complete their share sales before then.

All told, CS&L shares currently trade some 34% below their original price. At levels like these, Windstream has no business selling CS&L shares at a big loss. If anything, you're probably more likely to see CS&L buying back and retiring some of its own shares at attractive prices.


Our strategy is to diversify our assets by owning mission-critical communications network assets, including additional fiber and copper, but also data centers, coaxial towers and other related assets. We also plan to diversify our customer base by leasing these mission-critical assets to credit-worthy customers over long periods of time. Our network today encompasses 3.5 million strand miles of fiber and 235,000 route miles of copper. Although these assets are leased exclusively to Windstream, our network serves over 3 million carrier, enterprise and consumer customers.

That's a lot of high-speed fiber. Sure, the company serves 3 million end users today via the Windstream intermediary, but it's already pretty clear that CS&L's leaders want to do more. So how big is the potential target market for high-speed data customers not named Windstream?

CS&L CEO Kenny Gunderman. Source: CS&L.

Market size

We estimate that there are well over 2,000 communications, technology, utilities and other companies who own or are constructing mission-critical network assets, and all represent our target universe. These companies are both large and small and publicly and privately held. Further, based upon various estimates of just the fiber and copper addressable markets alone, we believe we have less than 1% market share. This does not include the other asset classes I mentioned, nor does it include the billions of dollars of new assets being constructed each year. Needless to say, we believe our opportunity set is tremendous.

Even if CS&L limits itself to serving only corporate customers with direct high-speed networking needs, we're already talking about a very large potential target market. And with only one customer so far, the company clearly stands to benefit from branching out.

In the long run, if CS&L sticks with the ambitious growth strategy outlined here, the company could become a direct competitor to long-haul networking specialist Level 3 Communications (NYSE:LVLT). That company collects $7.7 billion in annual sales, doing almost exactly what Gunderman envisions CS&L becoming in the future. That's about 10 times CS&L's current run rate of approximately $770 million in annual sales. Level 3 also sports a market cap more than five times larger than CS&L's, even though the networking veteran's profit margins are far thinner than CS&L's.

Deals in the pipeline

Since our spinoff, we have built a robust pipeline of over 100 opportunities with approximately 50% of those opportunities in fiber assets, 35% in a combination of fiber and copper and 15% in data centers and other assets. Approximately 40% of those opportunities are sale-leasebacks, 30% are partnering in M&A, and the remaining 30% represents either acquiring entire companies or capital programs.

That's a wide variety of operating options. Writing CS&L off as a boring data cable manager with narrowly limited growth opportunities would be a big mistake in my view. Now, having discussions in all of these business buckets doesn't necessarily mean that all of them will pan out. But you can't win if you don't play, and CS&L is most definitely not sitting on its hands.

Buyout structures

As we've said all along, we absolutely would entertain acquiring entire companies and using our taxable REIT subsidiary, which as a REIT allows us to have up to 25% of our assets in non-REITable assets. Given our size as a public company out of the gate, that basket is quite sizable for us, and it's not being used at all today. We look at that as a great tool to help further our strategy of diversification, whether it be warehousing operations for short period of time, so essentially acquiring a company and warehousing the operations and perhaps selling them later. Or developing a platform operating business within our overall structure that we use synergistically going forward to look at other acquisitions.

And this is how it all starts. Expect CS&L to start announcing various acquisitions, partnerships, and networking asset buyouts over the next few quarters. The company has about $183 million of cash on hand and a line of credit that boosts CS&L's capital investment budget to about $450 million today.

Using up the entire budget would boost CS&L's managed assets by roughly 18%, opening the door for non-Windstream business deals on a similar scale.