The REIT Way: CS&L Chief Executive Focused On Growing Business, Diversifying Wireline Portfolio

Since Communications Sales & Leasing Inc. (CS&L) officially became a publicly traded company on April 17, the new chief executive of Arkansas’ first real estate investment trust (REIT) likens himself to a top-shelf quarterback with an all-star line-up of investment bankers, dealmakers and telecom veterans.

Two months before CS&L’s first trade, the Windstream Corp. board officially selected former Stephens Inc. investment banker Kenny Gunderman to run the state’s newest publicly held concern. Now separated from Windstream Corp., CS&L has been trading for just over a month on the Nasdaq stock exchange under the symbol “CSAL.”

Since that time, Gunderman has been working long hours and racking up frequent flier miles in his efforts to put together an experienced, but small team of top-notch executives with dealmaking and market experience to run what is believed to be the first REIT to focus solely on the acquisition and leasing of communication distribution assets.

With former Alltel and Windstream investor relations executive Rob Clancy at his side, a relaxed but upbeat Gunderman gave an assessment of CS&L’s mad dash out of the gate that allowed the $8 billion real estate investment trust to hit the ground running with a roster of only about 35 employees.

“What has been exciting for me (has) been building a team, starting from virtually zero and … putting in place A-players in every position,” Gunderman told Talk Business & Politics at the company’s still freshly decorated corporate headquarters in Executive Center Drive in West Little Rock. “It’s great to be surrounded by people who are smarter than I am.”

FROM ARKANSAS TO WALL STREET, BACK TO ARKANSAS
Although Gunderman downplays his own executive chops, how he came into this position is a unique, feel-good story about an Arkansas college graduate who found success on Wall Street and then came back home to ply his trade.

A 1993 Hendrix College grad, Gunderman left Arkansas several years later and ended up moving to New York City where he became a successful Lehman Brothers investment banker on Wall Street.

As a senior telecom services and wireline investment banker at the now defunct New York investment firm, Gunderman advised various transactions and financings deals totaling more than $125 billion. Yet, he jumped at the chance to come back home in 2006 as a senior telecom banker for Little Rock’s venerable investment banking giant, Stephens Inc.

And the time to leave Lehman was obviously right because the nation’s fourth-largest investment bank would implode some two years later into Chapter 11 bankruptcy at the beginning of the 2008 financial crisis that shook financial markets across the globe.

Back home, the Hendrix grad-turned telecom investment banker’s soft landing in Arkansas occurred just as the former Alltel Corp. had begun the break-up of major portions of its wireline and wireless business that eventually led to the $28.1 billion purchase of the Little Rock wireless giant to Verizon Corp. in January 2009.

Yet, the initial step in the eventual break-up of Little Rock’s wireless giant began on July 17, 2006 with the completion of the spinoff of Alltel’s landline business and merger with Valor Communications Group, Inc.

Led largely by a band of former Alltel disciples, that company began trading on the New York Stock Exchange on July 18, 2006 as Windstream Corp.

In his role as senior telecom investment banker and the former executive vice president and co-head of investment banking for Stephens Inc., Gunderman said he gained intimate knowledge of Windstream during talks with company executives during that time.

“One of the first client relationships for me (at Stephens) was Windstream,” Gunderman said. “I knew many of the former Alltel guys from their Alltel days such as (former Windstream CEO) Jeff Gardner, and just continued those relations when they went to Windstream.”

It was then, Gunderman said, when the idea of actually spinning Windstream into a publicly-held real estate investment trust first took shape.

“I am not taking the credit for the idea by the way, but Windstream is a unique and interesting company and was going through a transformation,” Gunderman recalls. “During their entire life cycle, they are always looking at ideas, always looking at alternatives and ways to change and transform the company.

“This was just one of the ideas that surfaced a couple of years ago and about the time the IRS was expanding their view of what real property was at the time,” he said.

Those early conversations with Windstream and Alltel executives led to further questions on whether or not assets such as wireless towers, data centers, hospitals and even casinos could be viewed as real property.

But the lightbulb moment in the evolution of these informal debates came in late 2012 when Penn National Gaming announced its intentions to separate its gaming operating assets and real property assets into two tax-free, publicly traded real estate investments trusts.

“That was the first time a REIT had been spun out of a publicly traded company,” Gunderman said. “We put all those things together and there was an eventual conclusion that maybe we ought to think about turning fiber and copper into a REIT.”

Still, Gunderman credits Windstream’s board of directors and executive team for being the first company in the telecom sector to begin asking that question. “There are other companies who thought about, but what is unique about Windstream was they actually put resources to that question … and presented it to the IRS.”

Windstream officials had to wait almost two years before the IRS came back with a definitive answer. In 2014, Windstream obtained a private letter ruling from IRS officials confirming that certain telecommunications network assets constitute real estate assets under applicable REIT rules.

“And the answer was ‘yes,’” Gunderman said of the moment the plan to develop Windstream’s real estate assets into a REIT became real.

CS&L A-TEAM READY FOR DEAL MAKING
Today, Gunderman is supremely confident that he and his team are up to the task to grow the company. About a month before CS&L went public, he added industry veteran Mark Wallace as senior vice president, chief financial officer and treasurer of the new company.

Wallace formerly served as a managing director at New York City-based Fortress Investment Group Inc., but made the choice to move to Little Rock to serve with Gunderman.

“He is a seasoned CFO with extensive REIT and capital markets experience, and I look forward to working with him to continue building our team and our business,” Gunderman said after Wallace’s hire.

Two other important members of his inner executive circle are Daniel Heard and Clancy. Gunderman said he was very excited that he was able to convince Heard to leave the Little Rock law offices of Kutak Rock and serve as his general counsel.

The Little Rock attorney comes to CS&L with valuable experience, including more than 15 years of background in negotiating, structuring and consummating mergers and acquisitions, and public offerings of debt and equity securities.

Clancy came to Windstream with the spinoff from Alltel, where he served as vice president of investor relations in addition to holding a variety of other management roles. He left Windstream a few years ago to take a similar role with Cbeyond Inc., the Chicago-based telecom arm of Fortune 500 IT tech giant Birch Communications. But he is now back on familiar ground as treasurer and vice president of investor relations for the Arkansas REIT.

And just this past week, CS&L Chairman Francis X. “Skip” Frantz announced that Jennifer Banner and David Solomon will join the company’s board of directors, increasing the size of the CS&L’s board from two to four members.

Banner, former CEO of Schaad Companies LLC, a 105-year old privately held real estate holding company, will chair the company’s audit committee. Solomon, formerly CEO and Executive Chairman of Nuvox Communications, will lead CS&L’s compensation committee.

Heard, Clancy and Wallace, will report directly to Gunderman, and share equally in the duties of telling the story of a different type of company that one Wall Street analyst called “a canary in a coal mine.”

“As a former banker, this is a great fit for me and my banking background,” Gunderman said. “To go out and tell this story is something I am very excited about. The opportunity is limitless.”

Still, the newly-hired CS&L chief admits the company has a big challenge over the next few months to educate, investors, the financial industry, shareholder, partners and potential tenants about the Arkansas REIT, and explain how the Little Rock real estate trust will grow and move beyond its current status as a single-tenant landowner.

Immediately after the Windstream spin off, CS&L became the owner of 64,000 route miles of fiber, 235,000 route miles of copper and central office land and buildings across 29 states. CS&L now rents those assets back to Windstream through a 15-year, triple-net lease.

The key concern from the financial and investment community, besides the fact that CS&L is the first real estate investment trust of its kind, is that Windstream is its only current tenant.

Obviously, Gunderman said, a key priority for the executive team is quickly moving to diversify the company’s real estate portfolio and move away from its dependency on Windstream for future rental income.

“To us, that is an important question that people (ask) – ‘Are you going to diversify?’” he said. “We want to be diversified. Windstream wants us to be diversified – so that is an issue.”

But Gunderman says he is eager to get before an audience of Wall Street analysts, investors or shareholders and tell the exciting story of the company’s future. Just this past week, Gunderman and Wallace appeared at the Stephens Spring Investment Conference and REITWeek 2015 NAREIT’s Investor Forum, both held on Wall Street. “The reaction from folks is that ‘we hear you, we see the growth potential and we kind of believe it …, but prove it.’”

Going forward, Gunderman gave an affirmative nod when asked if CS&L is looking to acquire new assets or make a deal that grows the company’s portfolio and revenues. However, Gunderman said that his team has to stay disciplined and not “jump at the first deal” if it is not a good fit for the company.

“As importantly as it is to do a deal soon, it is as equally important to do a good deal,” he said. “We are focused on doing both those things.”

Gunderman said there are “hundreds of hundreds” of phone and fiber-based telecoms, from small rural wireline players to regional and national wireline players, that offer CS&L ample opportunities for deal-making in the future.

To achieve those goals, CS&L has a senior secured credit agreement consisting of a $2.14 billion term loan with a maturity of seven and a half years and a $500 million revolving credit facility with a maturity of five years. A portion of the term loan was funded in cash and a portion was issued to Windstream Services, both of which CS&L used to acquire the communication distribution system assets from Windstream.

Despite having to pay back billions to its parent company, Gunderman said the Windstream board made sure that CS&L had enough financial flexibility to grow the business and create its own niche as a real estate trust. Out of the gate, CS&L has nearly $60 million in cash on hand, a $500 million revolving credit line, and the leverage to access equity markets to finance any future deals.

“The (Windstream board) knew that in order for us to be successful, we would have to grow through acquisitions,” said the Little Rock telecom executive. “So there was a lot of thought put into the capital structure.”

WHAT ABOUT THE NAME?
The only thing left, of course, is what to do with the CS&L moniker that tends to make its way into any discussions about the company’s future. In an earlier interview with Talk Business & Politics in March, Windstream CEO Tony Thomas told the story of why the “unsexy” name of “Communications Sales and Leasing” was chosen for the Arkansas REIT.

Thomas explained there was no formal name for the company when a regulatory filing was due near the spin-off deadline. The difficulty and time needed to trademark a name would have taken months, or possibly years, to register.

So, Windstream decided to crawl through corporation names Windstream already owned from one of its previous acquisitions. They stumbled through a few and decided the CS&L name would work in a pinch. In that same interview, Thomas joked that “branding now falls to Mr. Gunderman.”

When asked about the Windstream CEO’s response, Gunderman had a difficult time trying to find the right words to describe his branding chore and said that he hoped “Thomas was laughing when he said that.”

“We did inherit the name,” the CS&L chief executive said with a wry smile. “And we are currently looking at alternatives.”