Landmark Infrastructure Partners LP
Q2 2020 Earnings Call Transcript

Published: 6 Aug 2020

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to Landmark Infrastructure Partners' Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today's conference may be recorded. I would now like to hand the conference over to your host, VP of Investor Relations, Marcelo Choi. Sir, please go ahead.

[Marcelo Choi:]

Thank you and good morning. We'd like to welcome you to Landmark Infrastructure Partners' second quarter earnings call. Today, we'll share an operating financial overview of the business, and we'll also take your questions following our presentation. Presenting on the call today are Tim Brazy, Chief Executive Officer; and George Doyle, Chief Financial Officer. I'd like to remind all participants that our comments today will include forward-looking statements, which are subject to certain risks and uncertainties. A number of factors and uncertainties could cause actual results in future periods to differ materially from our current expectations. For a complete discussion of these risks, we encourage you to read the Partnership's earnings release and documents on file with the SEC. Additionally, we may refer to non-GAAP measures such as FFO, AFFO, EBITDA, and adjusted EBITDA during the call. Please refer to the earnings release and our public filings for definitions and reconciliations of these non-GAAP measures to their most comparable GAAP measures.

[Arthur Brazy:]

Marcelo, thank you. And good morning, everyone. I hope you're all doing well and managing in what are certainly challenging times. Before we discuss this quarter's financial and operating results, I'd like to provide you with a further update on the pandemic's impact on our overall business, as well as that of our sponsor. As we discussed on the last earnings call, our management team transitioned to a distributed remote workforce and implemented contingency plans that allowed us to pivot with minimal disruptions when the pandemic intensified in the first quarter. Our sponsor's headquarters and satellite offices are still closed, and the 170 employees have been working from home since the middle of March. At the appropriate time, we'll consider reopening offices with strict protocols in place. But that decision and the pace of reopening will be determined by a number of different factors, with the safety of our employees as our first priority. Our sponsor has adapted to what is now the new normal, and we're extremely proud of our team and what we've accomplished since the transition. In terms of our tenants, we continue to monitor their markets and performance, and we're encouraged by what we're seeing. We're confident that the COVID pandemic will not significantly impact our wireless communication or renewable power generation portfolio. Although we have seen some permitting and project delays, the fundamentals remain very favorable in both of these industries. Wireless communication and power generation are not just essential services, but are absolutely critical in today's world. Like utilities, these industries play an essential role in modern day life, providing critical connectivity and power, and they've generally performed well in past economic downturns. Now, before I turn to the broader outdoor advertising industry, I'd like to take a moment to discuss the recent sale of our European outdoor advertising portfolio in mi-June. This sale was an opportunistic transaction, resulting from an attractive unsolicited bid, allowing us to de-lever the balance sheet, and providing us with significant capital to take advantage of the acquisition and development opportunities we expect to see in the market. While we continue to view outdoor advertising as a very attractive segment over the long term, this disposition significantly improved our liquidity in an uncertain environment, and further positioned the Partnership for growth. While outdoor advertising near-term fundamentals remain challenging due to the pandemic, we are seeing some positive signs in the industry. As a result of re-openings across the country and globally, outdoor traffic counts have improved significantly and are approaching pre-pandemic levels in a number of markets. Since the infrastructure of our tenants is typically the larger format billboards along major highways, the increase in traffic counts is an important metric for our tenants and their outdoor advertisers. Outdoor advertising companies have also taken measures to improve their balance sheets and right size their cost structures, which should help in their ability to navigate through these unprecedented times. They've raised cash through drawdowns of their revolving credit facilities, some have selectively sold assets, and others have directly raised capital, enhancing their balance sheets and financing flexibility.

[George Doyle:]

Thank you, Tim. As Tim mentioned in his remarks, the assets in our portfolio performed extremely well in the second quarter, considering the backdrop of the pandemic. We experienced a small decline in organic growth in the outdoor advertising portfolio, but this was offset by growth across our other segments. This is certainly at the better end of the spectrum of our expectations, as we were entering into the pandemic, but it's also reflective of the high quality of our portfolio. We're likely to see additional impacts to our portfolio in Q3, but we also expect that the overall portfolio will benefit from the contractual escalators and higher renewal rates on our existing leases. Before we get into too much detail on the results for the second quarter, I wanted to discuss the disposition of the European outdoor advertising joint venture that occurred in June. This disposition provided us with an opportunity to raise capital and de-lever in an environment where the capital markets are generally not accessible on attractive terms. While the majority of the proceeds were used to pay down our line of credit, our debt to EBITDA level under the revolver was reduced to slightly less than three times, which is well below the covenant threshold of eight times. Turning to the accounting the impact from this transaction. For all periods presented, the disposition is treated as discontinued operations, with the related assets and liabilities reclassified to assets and liabilities held for sale on the consolidated balance sheet, and the related operating results reported as income from discontinued operations on the consolidated statement of operations. Turning to the rest of the portfolio and continuing operations. In the second quarter of 2020, rental revenue was $13.8 million, which was 1% higher year-over-year. The growth in revenue was driven from a number of lease amendments, as well as the customary contractual lease escalators and the impact from accretive acquisitions completed within the last 12 months. But partially offsetting these increases was lower rental revenue from the outdoor advertising assets. The lower rental revenue from our outdoor advertising segment was due primarily to rent reductions and abatements, and lower percentage rent from leases with revenue sharing provisions. Excluding total revenue from our European outdoor advertising portfolio that is included in discontinued operations, outdoor advertising rental revenue declined by approximately $250,000 or approximately 6%, compared to the first quarter of 2022. During the second quarter of 2020, revenue from leases with revenue sharing provisions declined by approximately $200,000 from the first quarter of 2020. After the completion of the disposition of our European outdoor advertising joint venture, our outdoor advertising revenue concentration and continuing operations decreased to approximately 27% of total revenue for the quarter. And while we expect further requests for rent reductions and abatements, we are optimistic that the worst is behind us and that we will be able to navigate through these challenges.

[Operator:]

Thank you. Our first question comes from Rick Prentiss with Raymond James. Your line is now open.

[Rick Prentiss:]

Hi guys. Glad to hear everyone, sounds like they're doing okay, employee, family, and business, actually. A couple of questions; first, on the outdoor space, when you mentioned rent relief request or abatements, was the $250,000 down quarter-over-quarter or 6%, does that includes the revenue share minus $200,000, as well?

[George Doyle:]

Now, a lot of the impact from some of the recent amendments on the leases or reductions in rent are going to show up in Q3. So there's a little bit of the impact this quarter, but it takes a little bit time to process the amendments. So most of the decline in outdoor advertising revenue this quarter was attributable as percentage rent leases and a little bit was attributable to other factors.

[Rick Prentiss:]

So as we think through what you've seen in June into July, how should we think about what that rent abatement, rent reduction magnitude might be quarter-to-quarter from Q2 to Q3?

[George Doyle:]

Sure, I would expect that the impact of the reductions that we’ve given to our tenants on the outdoor side of things would result in a decline of about $50,000. You know, might be a little bit more depending on how things proceed. But a portion of that will be offset by escalators on the other portion of the leases that are hitting their annual escalator during the third quarter.

[Rick Prentiss:]

So that's what you meant by - the worst is behind us in that third quarter, had a little better dynamics than Q2 versus Q1.

[George Doyle:]

Yes, we think so. So long as we don't enter into another severe lockdown period or the economy continues to substantially deteriorate. We're starting to see some of the announcements from the outdoor companies this quarter, and what they're generally saying, based on the limited results we've seen is that the middle of Q2 was the worst, things are starting to rebound. And they're optimistic that, as you look forward over the remainder of 2020, that their revenue is going to continue to grow. We're also in an election year, and we should start to see more political spending here in the latter part of the year. So number of factors kind of support better operating conditions for the outdoor companies. But again, it's all dependent upon whether we get into another severe lockdown or the economy goes the other direction on us.

[Rick Prentiss:]

[George Doyle:]

Sure, there was certainly a lot of activity during the quarter. We obviously sold the outdoor portfolio in Europe; we terminated a number of hedging arrangements so now we're lower leverage. So when you kind of factor all those things in, from an AFFO standpoint that looks like it's going to be slightly dilutive. So we're looking forward as run-rate results would be too different from what they were this quarter. But then again, you have to factor in the impact of the pandemic, and certainly any sort of capital that we ended up to point. So this was a very attractive disposition from our standpoint, because it is similar to what we did in 2018. It's not very dilutive and lowers our leverage substantially to be able to redeploy, since we’re in a pandemic, hunker down potentially here for a period of time. On the EBITDA side of things, we do in the Q break out what the operations from discontinued operations are. So we have the detail in there, but roughly when you look at the quarter the amount EBITDA impact, it's in the $1.2 million, $1.3 million impact per quarter and since the sale of the portfolio took place in the middle of June, it really didn't have too much impact on this quarter, but that's roughly what the impact would be as you look forward.

[Rick Prentiss:]

And obviously, your coverage ratio is significant. Nice to be above one but you guys are well, well above one. You've mentioned I think a couple of times in the prepared remarks about opportunities that might work, looking forward to acquisitions. How should we think about the pacing of what you might be seeing out there and the ability to put that capital to work and at what kind of cap rates?

[George Doyle:]

Sure. So we're still seeing an active, I would say, acquisition or M&A-type market. Deals are getting done, and those are predominantly going to be in the telecom digital infrastructure side of things. We don't see quite as much going on in Outdoor as you would expect, since it’s severely impacted at the moment and then, renewables as well. Those assets have not been impacted by the pandemic, but development activity in a lot of areas has come to a screeching halt. So looking forward over the next year, we see visibility on the telecom digital infrastructure-type segments, deals can get done. On the Outdoor side of things, we expect opportunities will come up, but we just haven't seen any and we're not really interested near-term on focusing heavily on outdoor-type activities, but it's going to-- as far as what we end up requiring, that’s really going to depend on what we find attractive relative to the overall backdrop of the environment we're in. From a cap rate perspective, depending on the asset class and the particular assets, we're looking at cap rates anywhere in the five to maybe eight range. Now, the five range is not particularly attractive for us. That's more where the telecom type assets would trade a large portfolio. But there may be select opportunities that are towards the middle to higher end of that range.

[Rick Prentiss:]

And there have been reports out there that the parent level maybe is exploring the opportunities of a sale. Can you talk to that at all about is something going on? Does it -- and how would it affect the Landmark public stock?

[George Doyle:]

Sure, yes. I can't really comment about anything going on relative to a transaction at Landmark Dividend. But I can' say that Landmark Dividend, as it -- it as an ongoing acquisition and operating platform. It's kind of continuing as normal in this type of environment. We're seeing healthy acquisition activity. We're both on the buy side of things. We see lots of interest by institutional groups in the asset class on the sell side of things. But for the most part, I would say it's physicist normal. And if there is some sort of transaction at Landmark Dividend, it doesn't impact the Partnership itself. That would be a separate entity.

[Rick Prentiss:]

Okay, very good. Thanks, and continue to stay healthy and well, guys.

[George Doyle:]

All right. Thanks, Rick. You too.

[Arthur Brazy:]

You too.

[Operator:]

Thank you. Our next question comes from Liam Burke with B. Riley FBR. Your line is now open.

[Liam Burke:]

Thank you, and good morning. On the projects, you completed 70 kiosks on DART. Beginning to generate revenue, we'll call it fourth quarter. How does the build-out look, understand -- to 2021? And how do you see that ramping, understanding that you've had a pretty strong headwind here with COVID-19?

[George Doyle:]

Sure. Our ultimate goal for the DART project is to end up somewhere in the -- call it 300 to 350 kiosks range. These are dual-sided kiosks. So, you're looking at advertising screens in the 600 to 700 range. So, it's pretty sizable relative to what we have deployed today. I would say it's going to be relatively consistent deployment as you look out to the end of 2021. Now, certainly, different factors could impact that, such as delays in shipment of equipment. It is coming from -- a lot of the kiosks are coming from Asia. So, depending on lockdowns and restrictions, that could certainly create some challenges. Certainly, if we can't mobilize teams, that would create some challenges. But we think, generally, it's going to be pretty smooth deployment from now until you get to that end of 2021 timeframe.

[Liam Burke:]

Okay. And Vertex? Same question in terms of -- obviously, you're behind on deployment. But I mean, have you -- has COVID created much more of a headwind into 2021 in terms of deployment there?

[George Doyle:]

I would say that as far as mobilizing teams to do the actual construction development work, and being able to travel to do the development type work, that's certainly been delayed in a number of areas, and has been a little bit more challenging. As far as what kind of interest we're seeing in the product or the solution that we're providing. We're seeing strong interest, and we're progressing. But yes, it has been a bit harder to certainly get things in the ground. It takes a lot of effort and a lot of work with different groups to be able to move these forward, and we've certainly seen restrictions on physical movement. We've seen limitations with governmental entities and their ability to process permits, things like that. But we are making good headway, and hopefully, restrictions continue to lift and we can show our results here near term.

[Liam Burke:]

Okay. Now, you mentioned the cap rates on acquisitions. And then my understanding is the infrastructure built out on projects like Vertex come with a much higher return potential, understanding the payoff is extended due to the build out time. Is there any change in your view on returns, these are the acquisitions and build out?

[George Doyle:]

Not so much on Vertex. I would say on DART near term, the returns are probably going to be a little bit lower than we originally expected. And that certainly is a function of the pandemic. I mean it is an outdoor advertising type project. But I think by the time we have all the kiosks in the ground, hopefully we're in a much better environment, and we're talking about the second half of 2021, where the economic rebound has occurred, and solid footing, and advertising rates are where we would expect them to be. So near term, yes, a little bit of impact on DART. But long term, no. The projects are coming in as we expected.

[Liam Burke:]

Great. Thank you, George.

[George Doyle:]

Absolutely.

[Operator:]

Thank you. Our next question comes from Laura Lee with RBC Capital Markets. Your line is now open.

[Laura Lee:]

Great. Thank you. So first question is probably for George. There was a drop in in SG&A in the second quarter. I was wondering how much of that is related to perhaps benefit, in a way, savings from total pandemic , i.e., lower T&E expenses, travel expenses of that sort, or is that just indicative of the trend that we should be looking at go forward?

[George Doyle:]

From a G&A standpoint, we typically don't incur travel related expenses at public companies, since the employees are at the Landmark Dividend level. G&A does tend to bounce around a little bit quarter to quarter, so I wouldn't put too much focus on particular quarter change. I would say though that the thing that is going to impact G&A going forward is the disposition of the U.K. portfolio. So, with the U.K. portfolio, we are incurring higher tax costs, other kind of G&A costs associated with having entity set up in Europe, legal costs, those type of things. So for the quarter, you had probably about $100,000 G&A related to the U.K. Year-to-date, it was about $200,000. So when you look at an annual run, that's more in the magnitude of the numbers you would see. So maybe $200,000 to $400,000 on an annual basis might be G&A savings from the disposition of the U.K. business or the European business.

[Laura Lee:]

Got it. And in terms of the competitive landscape, are you seeing any increasing competition for acquisitions? Or is it pretty much status quo? And on the flip side, are you seeing an increased interest by landowners, who are basically just interested in monetizing, given the current environment?

[George Doyle:]

Yes. I would actually say yes to both of those questions. There is a little bit more competition on the ground lease side of things. Certainly, ground leases have performed extremely well in this type of environment. Obviously, we've seen a little bit of an impact in the outdoor segment, as far as the stability of those cash flows. But overall, so far, things have performed fairly well. And certainly, when you look at our portfolio, how it's performed relative to a lot of other real estate asset classes or even infrastructure asset classes for that matter, it's held up very well. When you look at -- I'm sorry. The second part of your question, again was?

[Laura Lee:]

If you're saying landowners actually coming to you more or if there's just more supply because people are looking to monetize.

[George Doyle:]

Yes, thank you. So, yes, we actually do see more interest now in the pandemic of property owners looking to dispose of what I would call for them would be kind of non-core assets or assets that are not call it a key component of their business or a key component of their investment strategy. So, yes, we are seeing more interest, property owners disposing of assets, and that's across the entire spectrum of what we invest in.

[Laura Lee:]

So, net, what does that do to valuation multiples? Is it just a net neutral between both sides? Increasing? Where do you see valuation multiples coming in?

[George Doyle:]

Portfolio-wide, they're probably the same. But whatever it says, you've probably seen a little bit of expansion of multiples in outdoor and a little bit tightening in other segments. The cost of debt right now as well, with the drop in LIBOR, the drop in treasuries, has certainly made it cheaper on the debt side of things. And the overall returns you can get from the assets is comparable. It just -- the cap rates have decreased or the multiples expanded a little bit with savings then on the debt side.

[Laura Lee:]

Okay. And sorry, last question. In terms of the increased competition that you're seeing, is that more from strategic or financial for that incremental interest?

[George Doyle:]

I would say it's more financial.

[Laura Lee:]

Got it. Thank you.

[Arthur Brazy:]

One other comment I'd make, Laura, is -- this is Tim -- is that the -- this is not the first financial crisis or economic crisis that we've been through. Remember the management of the sponsor has been in this business almost 20 years. So we do have at least a data point relative to the financial crisis in 2008, 2009. The market is so large, and the number of potential transactions is so big, and continues to grow year after year. We don't have an issue with the deal flow. That's not -- even though there is some increased competition at various points in time with the financial groups that George referred to, there's just more -- there are more transactions for us to look at than we've seen in the past. The opportunity continues to grow. And I think during a crisis, the landlord's look for alternative sources of liquidity. So a lot of discussions that we had two, three, four years ago at the sponsor level now come back to us, and that's one of the reasons why this is a difficult business for competition to come into because you really need to scale to a level where you can cover the market in a comprehensive way to be in a position to have those conversations.

[Laura Lee:]

Thank you, both.

[Operator:]

Thank you. And we have a follow up from Rick Prentiss with Raymond James. Your line is now open.

[Rick Prentiss:]

Hey, guys. Appreciate the follow-up. I noticed, this quarter, you've broken out wireless communication versus digital infrastructure. What is your definition of digital infrastructure? Would the Vertex go in there? Would DART go in there, or does DART go in outdoor advertising? Just what is digital infrastructure, and what goes in it, and where's the new stuff going to go?

[George Doyle:]

Sure, that's a good question, Rick. The breakout of digital infrastructure is for the handful of data centers that we own. These are powered shell investments, triple net, very similar kind of risk return profile as our traditional ground lease type assets, but we do technically own the ground and the shell of the building. So, these are generally longer-term triple net lease to either an enterprise or colocation company. And the digital infrastructure is a term that -- I'd say different people on the industry will define it their own way, but we use it for the data centers only. I would say the DART assets would go in outdoor advertising, and Vertex you would put in telecom.

[Rick Prentiss:]

Okay, good. That helps. And then the T-Mobile spread transaction is now closed. They've moved beyond and sold Boost from Sprint to Dish. What have you had as far as any discussions with the new T-Mobile as far as what they're doing with the network integrations? And what do you think the impact could be in timing for you guys?

[George Doyle:]

So, they -- we've certainly seen activity on the integration side of things. We know they're selecting or reviewing their lease and all the leases that they have and determining which sites they're going to keep or those that they're going to let go. Not sure how much besides development they're going to let go or going to get picked up by Dish or somebody else. We don't have a lot of visibility on that. But generally, what we're seeing is kind of consistent with what we expected. There's going to be some impact to the portfolio. It might be in the range of our consolidated revenue, in the 2%-ish range. But at the same time, there will be modifications on sites to accommodate the new set of equipment or the changes to the existing site equipment to incorporate the Sprint bandwidth or provide more coverage now that they have more demand on those sites. But we haven't -- we have not seen yet. The decommissioning is coming. They seem to be pretty proactive on it. So, I imagine they will start to show up in the next year, but it will certainly take time, and it will vary as they tackle different markets. I'd imagine this is very much a multi-year effort before we're through with the rationalization and elimination of some of the redundant sites there.

[Rick Prentiss:]

Okay, so I have 2% of consolidated revenues. Potentially some might get picked up by Dish or mitigated by modifications. Not gotten any de-com letters yet, but maybe coms in that 2% hit might be over a multi-year, maybe say three-year period?

[George Doyle:]

Yes, I think that's right.

[Rick Prentiss:]

Okay, great. Thanks for the follow-ups.

[George Doyle:]

You're welcome.

[Operator:]

Thank you. And I'm showing no further questions in the queue at this time. I'd like to turn the call back to Tim Brazy for any closing remarks.

[Arthur Brazy:]

Thank you, operator, and thank you, everyone, for joining us this morning. I know this is a difficult time for everybody. Uncharted territory, for sure. But as George and I have said, we've taken what we think are the appropriate steps to position the Company to withstand these challenges and take advantage of market opportunities as we as we move forward. And the strategy really hasn't changed. Our near-term focus should be maintaining our flexibility to address the ongoing effects of the health crisis and any further market disruptions. But we do believe that the fundamentals of our business are strong. And although it will take some time for aspects of the economy to recover, and we shake off the new normal, we're confident in the future of our industries in the Company. So with that, I want to wish you and your families well. Please be careful and stay safe, and we'll talk to you next quarter.

[Operator:]

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude your program. You may now disconnect.