Doubling down

One of the most uncomfortable things to do as an investor is to put more money into a losing position.  However, the lower prices make the reward to risk ratio better.    We found the news from UNIT to be quite encouraging, yet the market price remains extremely low.

In recent days and weeks, a few key pieces of information came out.

  • Dividend is to be cut to $0.05 for the next quarter and likely sits at a substantially lower run rate than the $0.60 it used to be.
  • UNIT attained a waiver from its lender
  • Windstream remains current on their lease

Investors never like a dividend cut, especially in a stock that was formerly owned by many for its high yield.  This is likely the reason for the continued drop in UNIT’s price.  It is important to note, however, that dividend policy has little to no impact on the fundamental value of a company.  It is a simple capital allocation decision and while I enjoyed receiving the dividend as much as anyone else, UNIT has more important uses for capital right now.

The dividend cut was necessary to attain a waiver from UNIT’s lender and due to this waiver, the going concern opinion from PWC (their auditor) will no longer trigger a default.  Unfortunately, UNIT did have to agree to a 200 basis point increase in the interest rate of this loan.  This, unlike the dividend cut, does negatively impact fundamental value.  It is the primary reason 2019 AFFO/share guidance dropped to $2.26 from $2.51 in 2018.  That is some value lost, but it is not huge and it can eventually be refinanced at a non-distressed rate.

Given where UNIT is trading, I don’t think anyone is concerned about a $0.25 drop in AFFO.  Even at the reduced AFFO, UNIT is trading at less than 5X forward AFFO.  Other tech REITs trade around 15X-20X.

The primary determinant of UNIT’s success or failure is the Windstream lease and this is where the good news came in.  Windstream paid their rent on time and in full.  The reason this is huge news is that this payment came after WIN’s chapter 11, meaning it was voluntary.  WIN chose to make the payment in order to continue using the assets.  I can’t impute intent, but it seems unlikely that WIN would do this unless they intend to affirm the lease officially.  If WIN had any intent to reject the lease, it seems they would have done so BEFORE making a massive rent payment.

Clearly, there is still uncertainty and things could still go wrong, but this was a big step toward stability.  If the surviving entity of the WIN bankruptcy makes full rent payments, UNIT’s AFFO will be quite secure above $2.00 a share and at that level of cashflow the market price should have upward pressure.

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