Uniti Group: Management Should Cut The Distribution – Uniti Group Inc. (NASDAQ:UNIT)

Hot stocks come and go here on Seeking Alpha, and there has been a lot of press on Uniti Group (UNIT) here recently; a large chunk from other authors I respect greatly. Curiosity always gets the best of me in these cases, and I’m never one to turn doing my own bit of due diligence to see what the fuss is about. Before I get into my own opinions on this one, I think its worth reiterating the fact that this is a speculative play – one that is drawing increasing attention from big money hedge funds and other large players. Battleground stocks like these can often claim retail investors as victims (see SunEdison (OTCPK:SUNEQ), my own coverage on Ocwen (OCN), etc.), so even if you see value, the old adage “if you can’t stand the heat, get out of the kitchen” applies here. High yield can often draw in investors that really have no business in that segment of the market, and I think its clear this one is going to have a wild ride going forward.

Business Overview, Value Of The Master Lease

Old information to most, but worth repeating just in case, Uniti Group was spun off from Windstream Holdings (WIN) early in 2015 in order to own and manage fiber and copper networks and other real estate. This was done purely to serve as a tax advantage and differentiator between two separate businesses, with Windstream being the lessee to Uniti Group under a triple net lease agreement. That lease has an initial term of fifteen years, with four five-year renewal options. Rent is $680mm annually given the current run rate, which escalates 0.5% annually after the first three years. Given this is a triple net lease, calculating the net present value of these cash flows (assuming no interruption) is pretty simple. Assuming a an initial $20mm in annual operating costs not covered under the lease (management/administrative salaries, public company costs, etc.) which grows 2% annually, you get a value of around $5,450mm for the fifteen year term using a 10% discount rate. While…

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