The 10% Yield REIT That Will Lose You Money

Dividend Investing, Real Estate Investment Trusts (REITs), Stocks to Avoid

I am sure income focused investors will be drawn to the new, high-yield REIT, Communications Sales & Leasing Inc. (Nasdaq:CSAL) –CS&L. First, for its 10% dividend yield, and second, because the company tells a good story selling this new type of REIT. After reviewing company presentations and looking into the overall telecom sector, my recommendation is that income investors avoid this investment. Although it may look enticing at first glance, I assure you that after looking deeper I have concluded that your money is not safe in this high-yield stock.

In April 2015, CS&L was spun off by land-based telecom company Windstream Holdings, Inc. (Nasdaq:WIN). CS&L became the owner of Windstream’s copper and fiber wireline assets. A private letter ruling from the IRS allowed the new company to be structured as a REIT. As a REIT, CS&L does not pay corporate income taxes, and can pay the majority of its free cash flow as dividends to investors. With a planned initial dividend rate of $0.60 quarterly ($2.40 annual), CSAL currently yields just over 10%.

The Good News

Windstream has signed triple net leases with CS&L to use the REIT’s landline assets for Windstream’s telephone and Internet businesses. Net leases mean that Windstream is responsible for maintaining the lines. The leases have 15-year terms, locking in the REITs cash flow long-term. Expenses on the REIT are very low, with less than 50 employees and 93% of revenue drops to EBITDA.

The CS&L management team believes it can take its low-cost REIT structure and strike deals for additional telecom wireline assets. The IPO presentation notes that CS&L owns about 1% of the copper/coaxial connections and fiber optic miles in the U.S. Companies that own these assets could monetize them with sale-leaseback transactions with CS&L.

The Bad News

To start, CS&L has a single customer, Windstream Holdings. Windstream is a small-cap telecom company in a shrinking business – landline telephone service. The small regional telephone service companies have struggled for years trying to grow their Internet service businesses faster than customers stopped subscribing to landline telephones. It has mostly been a losing battle, and thus Windstream used the REIT spin-off to reduce its debt load and extend its survival life.

In the bigger picture, there are three types of telecom companies:

  • Wireless services providers like AT&T (NYSE:T) and Verizon (NYSE:VZ)
  • Cable companies like Comcast (Nasdaq:CMCSA) and Time Warner Cable (NYSE:TWC)
  • Traditional copper and fiber telephone and Internet companies like Windstream, Frontier Communications (NYSE:FTR) and Centurylink Inc. (NYSE:CTL).

The first two groups include $100 billion market cap companies that can spend billions on capital spending to grow their networks and technology. They can also spend billions on advertising. The last group is saddled with declined traditional telephone revenues, high debt loads and investors that own the stocks for the large dividends. It seems inevitable that groups one and two will eventually drive the traditional telephone companies out of business. I think it may happen a lot faster than the management teams at Windstream and Frontier believe.

The bottom line is that CS&L has great lease contracts and cash flows from a telecom sector that could become obsolete much faster than we realize. That 10% yield may be good for only a few years and it will be hard to see the warning signs before cash flows start to collapse.

High yield / high dividend growth REITs that you should buy are an integral part of the income strategy with my newsletter, The Dividend Hunter. And there are currently several in my Monthly Paycheck Dividend Calendar, an income system used by thousands of dividend investors enjoying a steady stream of cash.

The Monthly Dividend Paycheck Calendar is set up to make sure you’re a minimum of 5 and in some months 8, 9, even 12 paychecks per month from stable, reliable stocks with high yields.

And it ensures that your dividend stock income stream will be more stable and predictable as you’re getting payments every month, not just once a quarter like some investors do.

The Calendar tells you when you need to own the stock, when to expect your next payout, and how much you could make from stable, low risk stocks paying upwards of 8%, 9%, even 11% in the case of one of them. I’ve done all the research and hard work; you just have to pick the stocks and how much you want to get paid.

The next critical date this month comes on Friday, July 17th (it’s a lot closer than you think!), so you’ll want to take action before that date to make sure you don’t miss out. Click here to find out more about this unique, easy way of collecting monthly dividends.

 

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