Landmark Infrastructure Partners LP
Q3 2020 Earnings Call Transcript

Published: 4 Nov 2020

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Landmark Infrastructure Partners' Third 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. As a reminder, today’s conference call is being recorded. I would now like to turn the conference over to your host, Mr. Marcelo Choi, Vice President of Investor Relations. Sir, you may begin.

[Marcelo Choi:]

Thank you and good morning. We'd like to welcome you to Landmark Infrastructure Partners' third quarter earnings call. Today, we'll share an operating and 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.

[Tim Brazy:]

Marcelo, thank you. Good morning, everyone. I hope you're all doing well and continuing to manage during these very challenging times. Before we discuss the financial and operating results for the quarter, let me give you an update on the pandemic's impact on our overall business and that of our sponsor. As I've mentioned on prior earnings calls, our focus has been on the safety and health of our employees. Our sponsors headquarters and satellite offices are closed and will remain closed through the end of this year. Our sponsors’ 170 employees continue to work remotely. However, the shift to a distributed workforce has been very successful and everyone continues to execute at a very high level with minimal disruptions. Overall, we're extremely pleased with the execution of our business during this difficult time and you can see that in our results. Our portfolio continues to perform extremely well and we closed a number of large data center acquisitions in the third quarter. These acquisitions were part of our strategy for the redeployment of capital that we started following the disposition of our European outdoor advertising portfolio. Despite the difficulties of working remotely and with each transaction having its own set of unique challenges and requirements, our teams were able to close those deals as anticipated. With the support of the entire organization, our sponsor has been able to fully transition to a remote workforce, not ideal or desired, but extremely effective. As we think about leaning back into the office in the first quarter of next year, we'll be able to consider that knowing that we can be extremely productive in the office, working at home or remote location or with some hybrid approach. I'm incredibly proud of our team. They've performed at a tremendous level during a very challenging period and they’ve delivered some great results.

[George Doyle:]

Thank you, Tim. Our portfolio was resilient again this quarter, generating year-over-year AFFO growth during the year-to-date period ended September 30 despite the impact from the pandemic. A modest sequential decline in rental revenue from our outdoor advertising segment in the third quarter was more than offset by growth from our other segments, reflecting the high-quality of assets in our portfolio. As Tim mentioned in his remarks, we have seen the outdoor advertising industry continue to stabilize. While we are optimistic that we have seen the bottom for the outdoor industry, the recent COVID infection rates have been increasing and the full impact from this pandemic is unknown. Through the end of the third quarter, we continue to see virtually no impact from the pandemic on our wireless, renewable, and digital infrastructure assets, and expect our recent investments to drive meaningful growth in AFFO per unit in the fourth quarter and into 2021. Diving into our third quarter results, rental revenue for the quarter was $14.2 million, which was 10% higher year-over-year and 3% higher versus the second quarter. The year-over-year growth in rental 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. In the third quarter, outdoor advertising rental revenue declined by approximately $100,000 or 3%, compared to the second quarter of 2020, primarily due to lower percentage rent from leases with revenue sharing provisions. Turning to FFO and AFFO, FFO per diluted unit was $0.29 this quarter, compared to $0.20 in the third quarter of last year. As we have discussed in prior calls, FFO can fluctuate quarter-to-quarter depending on the change in the fair value of our interest rate hedges as well as various other items, including foreign currency transaction, gains and losses. AFFO, which excludes these gains and losses on our interest rate hedges and other items was $0.31 per diluted unit this quarter, compared to $0.32 in the third quarter of last year. Despite the challenges brought on by the pandemic and the disposition of our European outdoor advertising joint venture, we have driven AFFO growth on a year-to-day basis. As I mentioned earlier in my remarks, we expect to see further growth in AFFO per unit as the acquisitions completed in the third quarter were only outstanding during the third quarter on average for a period of 16 days.

[Operator:]

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

[Rick Prentiss:]

Thanks. Good morning, or good afternoon, guys. How are you doing?

[Tim Brazy:]

Good, Rick. Good to hear from you.

[Rick Prentiss:]

Good to hear from you too. Glad you're making some of these difficult times with resilience and operating safely. A couple of questions, if I could? You mentioned that the year-to-date acquisitions were about $133 million and $9.6 million annual rent. So, if we do that quick math, it looks like about a cap rate that you're paying. But how should we think about – how much did you spend on the deployment projects versus acquisitions?

[George Doyle:]

In the third quarter, Rick, we spent the majority of the capital on the acquisitions. We didn't have that much spend on the development projects. So, the $133 million is going to be all acquisitions.

[Rick Prentiss:]

The $133 million is year-to-date, right?

[George Doyle:]

Yes.

[Rick Prentiss:]

So, fairly minimal development throughout 2020 then?

[George Doyle:]

Yes, mostly. As we talked about last quarter as well, mostly, we're done with the hardware purchases, most of it is services related, and you know, there will be, you know, some ongoing services as we wrap up that project over the course of this year and next year, but services are a smaller amount of the spend at this point.

[Rick Prentiss:]

Makes sense. And then you mentioned you've got 88 of the DART kiosks in service. October 31, I think is what I wrote down, how should we think about what that revenue contribution might be in fourth quarter and then run rating on an annual basis? And will that show up in the wireless category or which category?

[George Doyle:]

For now, we expect the initial revenue to just be outdoor advertising revenue. The kind of way to think about it is the minimum rent is going to be, call it, around a on the deployed capital. But it is going to take some time for that to settle out because there's a lot of upfront costs that were incurred that aren't spread out evenly as the kiosks are deployed. So, you know, we're looking to have around 350 kiosks in total and the initial ones, I would expect the cap rate to be a bit lower, and then, it will average out to a six-cap. And then, over time, I would expect the percentage rent to kick in and then drive that higher.

[Rick Prentiss:]

Okay. That helps. And when we look at a couple other revenue items, just to stay on that area, the wireless side looks like you've had a few lease terminations, anything going on there, yet, as far as Sprint, T-Mobile? Or how should we think about the change in leases on the wireless side?

[George Doyle:]

You know, we're seeing, you know, one-off assets here and there churn, so it's not the – as far as we can tell, a trend of terminations coming in. I mean, we do expect some churn, obviously, coming from the Sprint, T-Mobile merger, but we are also, at the same time, seeing a fair amount of modification activity across the portfolio. So from what we've seen today, you know, we're offsetting that by a handful of new leases, and then, also increases in some of the existing sites, but we have not seen, call it, a wave of termination letters come in, yet, relative to the Sprint, T-Mobile merger.

[Rick Prentiss:]

Okay. And on the data center side, what sort of escalators, is that kind of maybe a 2% escalating business? Or as we think of those acquisitions you've made, and obviously, minimal spending at this locations, how should we think about the revenue growth rates on those assets that you're getting into in a big way, getting up to 25% of run rate?

[George Doyle:]

Sure. They generally range in the kind of 2%, 2.5% type range. I think, you know, historically, the – you know, the industry has seen a bit higher escalators, but at this point, they seem to be right around that 2% range.

[Rick Prentiss:]

Okay. And final one for me, on outdoor advertising, it does look like leases picked up from 2Q to 3Q, is that what you're kind of talking about that we've maybe seen the bottom at some recovery, and so, number of leases are trending up a little bit? Or is that some of the acquisitions?

[George Doyle:]

You're saying the number of leases or the revenue?

[Rick Prentiss:]

Yes, the number of leases because revenue was down quarter-over-quarter, but number of leases looks like it was up quarter-to-quarter.

[George Doyle:]

Yes, that's probably some of the DART sites that are being put in place.

[Rick Prentiss:]

Okay. they'll show up under outdoor advertising. Great.

[George Doyle:]

Yes.

[Rick Prentiss:]

Okay. Thanks, guy. Continue to stay well and look forward to updating view on the distribution, hence hopefully we can get through this pandemic and get a vaccine out there.

[Tim Brazy:]

Thanks Rick.

[George Doyle:]

Sounds good. Thank you, Rick.

[Rick Prentiss:]

Stay well.

[Operator:]

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

[Liam Burke:]

Good morning, Tim. Good morning, George.

[Tim Brazy:]

Good morning.

[George Doyle:]

Good morning.

[Liam Burke:]

You mentioned the deployment of a progress on Vertex, could you give us a sense of timeline similar to how you progressed on DART with actual deployment of kiosks? Could you give us a sense as to the deployment schedule?

[Tim Brazy:]

Yes, at this point, I would say it’s going to be pretty consistent deployment through roughly the middle-to-end of next year. So, we have a fair number of sites that are in progress. We have our remaining kiosks that are under order right now. So, I would expect – and this is going to be weather dependent and pandemic lockdown dependent, but I would expect it’s a pretty consistent deployment from here on out. So, in total we're targeting to have about 350 deployed through the middle-to-end of next year. I would expect we're in the 325 range. And then, the last will depend on when the sites are ready for the deployment. There's a certain number of sites that are under construction, and not from a kiosk standpoint, but just the transit system is doing construction there, so there will be a few lingering sites, but it should be pretty consistent over the course of the next 12 months.

[Liam Burke:]

Right. And then following that with Vertex, how does that look to you? Or do you have any sense that you could share with us where that progression looks – how that progression looks?

[George Doyle:]

Certainly, yes. The activity they're starting to pick up, we expect we'll have a number of sites that are in process of being deployed this quarter. And I would expect that as we kind of work through the winter timeframe and through the pandemic, that that starts to increase in the middle of next year.

[Liam Burke:]

Okay, great. And you mentioned the sponsor has a fairly sizable backlog of data centers. If I'm looking at your investment priorities into 2021, how would you balance infrastructure build-out or new infrastructure build-out forgetting for a moment DART and Vertex versus data center acquisitions?

[George Doyle:]

We think it's going to depend upon the opportunities that we see on the infrastructure development side of things. Those are – I would say, they're not as consistent of an opportunity as what we see on the data center side of things, so we like the development – you know, the developments because they're higher return typically and they fit very well with our existing portfolio. But they are more infrequent than, I would say, on the data center side of things. So, we're going to look to see what opportunities we can find on that front and certainly supplement some of our investment activity with attractive data center acquisitions.

[Liam Burke:]

Great. Thank you, George.

[George Doyle:]

You’re welcome.

[Operator:]

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

[Laura Lee:]

Hi, thanks for taking the questions. Just first of all on – can you comment on what sort of Sprint, T-Mobile activities you’ve been seeing? Is any either increased activity or decommissioning?

[George Doyle:]

Sure, okay. We've seen very little on the decommissioning front. We have seen the – some of the existing sites being upgraded, so we have seen some additional revenue from upgrades. We've seen a little bit of Dish activity in the market as well. But I would say generally, we've not seen a significant amount of terminations or waver terminations come through.

[Laura Lee:]

Do you have any sense from either conversations or backlog of any meaningful change in activity go forward from any of those parties?

[George Doyle:]

No. We don't at this point. It's still a bit uncertain as to, you know, what exactly they're doing and the timing of their moves, but like I mentioned, we do see Dish now starting to pick up sites in the market.

[Laura Lee:]

Okay, great. And to switch to the data centers, can you remind us – are they all SLBs, sale lease backs?

[George Doyle:]

Yes, these were – yes, these were all sale lease backs.

[Laura Lee:]

And can you give a sense of what the remaining lease terms are for these assets?

[George Doyle:]

Yes, they're generally going to be in the 10-year to 15-year range, so…

[Laura Lee:]

Okay.

[George Doyle:]

Very long.

[Laura Lee:]

And a last question on that, just strategically, are there – what are you thinking in terms of target markets for data centers? Are you looking – so you mentioned that you did some acquisitions in Toronto, as well as like it goes anywhere from Tier 1, 2, is that fairly accurate statement that you are looking at your Tier 1, 2, 3 regardless of market? Or are you trying to target a specific? Or are you more interested in specific assets rather than necessarily target sizes – target markets?

[George Doyle:]

I would say it's probably a bit a combination of both. The valuation of data centers is very asset specific. And we are very focused on our buying the – you know, the land in the , under critical use data center. So, these are heavily occupied in strategic locations, well connected to fiber. They – our investments we’re coming in at a relatively low basis relative to what our underlying tenant has invested in the site. So, certainly the Tier 1 markets, they're always attractive, I would say for the most part, obviously, because of the amount of activity there. But there are opportunities in Tier 2, Tier 3 markets that selectively we like. So, it really is a combination of both, but it definitely is heavily dependent on the characteristics of the asset and what kind of parameters we’re entering that investment at.

[Laura Lee:]

Got it. Thank you.

[George Doyle:]

You’re welcome.

[Operator:]

Thank you. Our next question comes from Dave Rogers of Baird. Your line is open.

[Dave Rogers:]

Oh, hey, good morning out there, guys. Probably most of my questions were answered. I guess, George, I would ask, though, in terms of the credit worthiness of the tenants that you're buying the data centers from, can you give us some comfort, some thought around how many tenants that is? How many different, you know, tenants you've acquired from so far? And what is that investment basis that you talked about?

[George Doyle:]

Sure.

[Dave Rogers:]

rate split?

[George Doyle:]

Sure. So, we have a variety of credits in the portfolio. Some are not rated, but I would say, they're pretty strong credit. It can range anything from, you know, investment grade down to, call it, you know, non-investment grade type credit. So, you know, in the BB or potentially the C range. What makes data centers so attractive is that it's such a critical asset that credit is only one element to evaluate and you've seen this over the course of the last year or so. There's been a few data center operators that have had, you know, some credit challenges. But the underlying business in the data center is, if it's a solid business, it typically withstands any sort of credit event at a corporate level for the tenant. And this is the same thing that you're seeing play out right now in the outdoor advertising industry in the same dynamic we have in the renewable industry as well. So, provided you have a great asset, it's heavily utilized by the tenants, you know, it is critical infrastructure, it's been upgraded significantly. You may not have the strongest credit in place with the tenant, but just the arrangement with that tenant with the infrastructure they have in our powered shell, it certainly diminishes the impact of a potential credit event on the portfolio. So, we feel that with the acquisitions we've done with the underlying occupancy and the tenants that we’re in a very secure position regardless of the credit profile of the tenant. And like I mentioned, same thing, you see in a number of our other asset classes as well, in our tenant bases, a variety of co-location companies, cloud and some enterprises as well. So, we have a bit of mix of tenant profile, and certainly, geography as well.

[Dave Rogers:]

And should we think about your basis in these assets, you know, on a per foot or per raised foot basis in the kind of mid-100s, is that a reasonable estimate?

[George Doyle:]

I would say it's probably slightly higher than that. You're probably in the mid-200s, if not a little bit higher, but what makes it attractive for us is our underlying tenants may have invested another, call it, 700,000 per square foot to turn the shell into a fully operating data center. And so, typically, what would happen at the end of a lease term, if for whatever reason, that tenant was not looking to renew the lease, well, they leave all those improvements at the site because it's not really practical to move them. And then, you have, you know, an asset where you bought at maybe that 250 per square foot range, but you end up with improvements that can be released that might have an all-in value per square foot of upwards of maybe 1,000 per square foot. So, you know, our investment is relatively low compared to the overall investment in one of these centers.

[Dave Rogers:]

Okay, thanks, George for the added color.

[George Doyle:]

Sure, absolutely.

[Operator:]

Thank you. We have a question from Rick Prentiss of Raymond James. Your line is open.

[Rick Prentiss:]

Hey, guys. Not as busy in earnings days the next of couple days, so I wanted to ask a couple extras since we've got the time.

[George Doyle:]

Sure.

[Rick Prentiss:]

On the cost side of things, how should we think about property operating costs? And as you get more into the data center spot, it was not up much 2Qs or 3Q, but obviously, you've got, you know, the full quarter of the data centers in 4Q. Are you expecting much of a change on the property operating expense area?

[George Doyle:]

There will be a little bit of a change, but not too much. Most of the expenses on the data centers would be reimbursed by the underlying tenant in the data center. So, it would end up being kind of a wash. Whatever additional operating expenses you get from owning one of these centers is typically, you know, there's offsetting revenue. Where we're likely to see a little bit more operating expenses is just from the DART project. You know, there are a few costs associated with that, but we won't see those until the – you know, more of the kiosks are deployed.

[Rick Prentiss:]

Okay. And on the G&A side, G&A came in late in the quarter, both year-over-year and quarter-over-quarter. Is that something sustainable? What should we think about G&A costs? And then, maybe an update, I think, the G&A contribution coming back from the sponsor, right now is on track to run through November of 2021?

[George Doyle:]

Yes, that's right. I would say G&A, for the quarter can be a little bit misleading just because of timing between the quarters. But on a year-to-date basis, we are down a bit on G&A, and I do think that is sustainable. We're focused on controlling some of our overhead costs. And certainly, we've been pretty active over the last couple of years doing a lot of things, different geographies, initiatives, some of that is starting to settle down, especially with the disposition of the UK portfolio – the European portfolio. So, I think that run rate this year, will ultimately be lower than 2019 and I think that is sustainable. You know, as we look out it towards the end of 2021, you know, the amount of the reimbursement from the sponsor, I would expect to be declining as we approach that point. But we haven't made an assessment yet, as to what the arrangement with the sponsor will be for G&A support, so that's something that we'll get into probably in the first part of next year with the sponsor.

[Rick Prentiss:]

All right. And last one for me, obviously, data centers mobile compute, edge compute, tower guys are talking a lot more about edge as well. How do you see the edge playing out? I know it's more of a theoretical concept and requires a different definition, but what are you thinking about with edge and what it might mean to your outdoor – sorry, wireless as well as your data center business?

[George Doyle:]

Yes, I think there will ultimately be opportunities on the edge side of things, but we just have not seen the revenue model develop yet. I think there's opportunities to have data centers at towers, rooftops and certainly, you can add more infrastructure at our existing data centers. But we've yet to see a lot of revenue opportunities tied with that. And I think that's what's ultimately going to drive the development on the edge side of things. I don't think it has too much of an impact on our existing portfolio. I would expect the existing operators or enterprises to that have consistent, if not, growing data storage needs at the existing facilities, but certainly, storage demand overall, whether it's edge or otherwise, I would expect is going to significantly grow here as, you know, 5G and some of the mobile computing needs are – grow.

[Tim Brazy:]

Well, you're going to need it for IoT. So, we're actually excited about having it develop further. But as George said, we just have not seen the model that drives that significantly quite yet. But the portfolio is well-positioned to take advantage of that, you know, when it does actually, you know, make an impact.

[Rick Prentiss:]

That seems like people are trying to learn right now, before doing a whole lot.

[Tim Brazy:]

Agreed.

[George Doyle:]

Yes, I think that's right, yes.

[Rick Prentiss:]

Okay. Thanks for the additional questions. Thanks, guys. Have a good day.

[George Doyle:]

Absolutely, you too.

[Operator:]

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

[Tim Brazy:]

Thank you, operator. And I want to thank everybody for joining us this morning. I know this is still a pretty difficult time for everyone on a – maybe a number of different levels. Certainly, uncharted territory. As George and I have talked about today, we've taken what we think are the appropriate steps to position Landmark to withstand the various challenges in the market and to take advantage of opportunities as we move forward. And we're going to maintain our current strategy, flexibility to address the ongoing effects of the pandemic, and for that matter, any further market disruptions. But we do believe that the fundamentals of our business are strong. It does look like it will still take some time for aspects of the economy to recover, but we're very confident in the future of our industries and the company. You know, and our assets have proven themselves to be incredibly resilient. So, we're – I think we're very well-positioned to take advantage of markets as we move forward. So with that, I want to wish you and your families well. Please continue to be careful and stay safe. And we'll talk to you next quarter.

[Operator:]

Thank you. Ladies and gentlemen, this does conclude today’s conference. Thanks you all for participating. You may now disconnect. Have a great day.