Landmark Infrastructure Partners LP
Q2 2019 Earnings Call Transcript

Published: 7 Aug 2019

[Operator:]

Good day ladies and gentlemen and welcome to the Landmark Infrastructure Partners' Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this conference call may be recorded. I would now like to introduce your host for today's conference Mr. Marcelo Choi, VP Investor Relations.

[Marcelo Choi:]

Thank you and good morning. We like to welcome you to Landmark Infrastructure Partners' second quarter earnings call. Today, we will 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, thanks very much. Good morning everyone. Today, we're going to discuss our financial and operating results for the second quarter and provide you with an update on our activities and more recent developments and strategic initiatives including our FlexGrid program. However, before we talk about our quarterly results, I'd like to take a few minutes to discuss the T-Mobile-Sprint transaction. As you know this merger transaction was announced over a year ago. After months of review, Justice Department just recently settled with T-Mobile and Sprint regarding the proposed transaction requiring a divestiture of assets to Dish and access for Dish and T-Mobile's network for an extended period of time so that Dish can position itself as a viable fourth facilities-based wireless competitor. Under the terms of the proposed settlement, T-Mobile and Sprint must divest Sprint's prepaid business to Dish including Boost Mobile, Virgin Mobile, and Sprint Prepaid. In addition the proposal also provides for the sale of certain spectrums to Dish. The 800 megahertz spectrum licenses along with access rights to T-Mobile's network, a minimum number of 20,000 cell sites, and hundreds of retail locations for Dish for a period of seven years. This arrangement is designed to assist Dish while it builds out its on 5G network and facilitate further 5G deployment across the industry. Now, although the official closing still faces a number of hurdles including various state challenges, the current structure incorporates several elements that make the transaction much more likely to happen than in the past. And as we've previously said we don't think a transaction would have much of an impact on our business. In fact based on the information we have today regarding the merger we view the recent developments as very positive for us.

[George Doyle:]

Thank you, Tim. As Tim outlined in his remarks, the assets in our portfolio continue to perform well, generating stable and predictable cash flows. In the second quarter, rental revenue was $15 million, which was 10.5% lower year-over-year and an increase of 4.4% from the first quarter. As we have outlined on prior calls, the JV established with Brookfield in the third quarter of 2018 is accounted for as an equity method investment. And the results of those properties are no longer consolidated into our revenue and operating expenses, or rather we pick up our share of net income of the JV through equity income in the unconsolidated JV. The assets that were contributed to the Landmark Brookfield JV generated rental revenue of approximately $3.6 million in the second quarter. Turning to FFO and AFFO. FFO per diluted unit was $0.07 this quarter, compared to $0.30 in the second quarter of last year. As we have discussed on past calls, FFO can fluctuate quarter to quarter, depending on the change and the fair value of our interest rate hedges. AFFO, which excludes these unrealized gains and losses on our interest rate hedges, along with other various items, was $0.33 per diluted unit this quarter, compared to $0.32 in the second quarter of last year. Now turning to our balance sheet. We finished the second quarter with approximately $167 million of outstanding borrowings under our revolving credit facility. In secured notes, we're at approximately $221 million at the end of the quarter. We ended the second quarter with 100% of our outstanding debt, either being fixed-rate debt or borrowings that have been fixed through interest rates swaps.

[Operator:]

Thank you. And our first question comes from Ric Prentiss from Raymond James. Your line is open.

[Ric Prentiss:]

Thanks. Hi, guys.

[Tim Brazy:]

Hi, Ric.

[George Doyle:]

Hi, Ric.

[Ric Prentiss:]

Hey. A couple of questions. I appreciate the update on the distribution coverage, including third quarter, but not getting to full coverage until fourth quarter 2019. How do you think about how it plays out in 2020? Which -- and does full coverage mean 1.0, 1.01. What does full coverage mean when you think 2020 holds for us given the timing of acquisitions and development?

[George Doyle:]

Sure. Once we get to full coverage from that point on, it will fluctuate a little bit depending on which quarter we get the final coverage in place. And then, I expect it to generally grow thereafter, so little over one-times initially from a coverage perspective. And then, I would expect that to get to kind of our normalized level at a minimum of 1.05 times. But it will take a kind of few quarters to get there and it's a function of the developments coming online and completing some of the acquisitions that we have got on our pipeline.

[Ric Prentiss:]

Okay. And speaking of development pipeline, the $13 million that you spent in the quarter, I think that was all for acquisitions? Or was there some FlexGrid CapEx in there? And what was the FlexGrid CapEx?

[George Doyle:]

The $13 million is year-to-date number and those are all acquisitions. As Tim mentioned, they are mostly U.K. foreign acquisitions. We did spend approximately $15 million on the different development projects. And some of that is going to be outdoor advertising such as the kiosks and some of it will be some of the FlexGrid infrastructure as well.

[Ric Prentiss:]

And is that $15 million is that a year-to-date numbers as well for first half?

[George Doyle:]

No that's just for the quarter.

[Ric Prentiss:]

Okay. And can you go back and -- you talked about at least some asset sales and some of the numbers on that. How many assets did you sell? And what was the price you got for them?

[George Doyle:]

It's a little under $32 million and it was -- I think it was approximately 28 assets.

[Ric Prentiss:]

Okay. And then $1.7 million in revenue annually for that?

[George Doyle:]

That's correct.

[Ric Prentiss:]

So kind of like a 6% cap rate?

[George Doyle:]

A little bit lower than that.

[Ric Prentiss:]

Okay. And when -- I think Tim you mentioned you'll start seeing some revenues from the development projects kind of by the end of '19. How much revenue should we -- is it like a rounding point? Does it actually noticeable by the fourth quarter? And how do you think what percent of revenues could the development projects represent may be in '20?

[George Doyle:]

That's a good question. As far as Q4, we expect to see a number of sites come online. But it's hard to say how many will exactly come online in Q4 versus fourth quarter and when exactly they will come on in the fourth quarter. So, we're expecting a small amount of revenue in the fourth quarter and then it should pick up starting in the first quarter of next year. From a total revenue perspective, we've invested roughly call it $60 million in projects. And based on the minimum return levels, call it seven cap would be the minimum and we'll be looking at generating $4 million, maybe $5 million in revenue of those projects based on what we spend today.

[Ric Prentiss:]

Right. Okay. Thanks guys.

[Operator:]

Thank you. And our next question comes from Dave Rodgers from Baird. Your line is open.

[Dave Rodgers:]

I just wanted to go back to the dividend coverage George if I could. And I understand you're saying full coverage in the fourth quarter and it'll bounce around I guess moving into '20. But can you give us a little more color on just kind of the delay in timing and what gives you the confidence then in the fourth quarter it's going to be there. Is there a big incremental spend? Is it some approvals you're waiting on? What gives us the comfort that you're going to get there this year?

[George Doyle:]

Sure. There's couple of things. One, as I mentioned, we're seeing fairly strong leasing activity. So based on some of the recent leases that we've executed and some of the leases that are in the pipeline for renewal, we anticipate higher revenue in the fourth quarter. We also have visibility on some of the developments that we're pursuing. We can see that some of those will be coming online in the fourth quarter. And then also our borrowing costs have dropped a bit. We did implement U.K. LIBOR borrowing, which has about 125 basis points, 150 basis points lower costs than a U.S. LIBOR borrowing would. We're also seeing the Fed drop rates a bit. So when you kind of put all the factors together plus a small amount of acquisitions that we're targeting in the third and fourth quarter. And that would give us to coverage in the fourth quarter.

[Dave Rodgers:]

And then to follow-up on the acquisitions. I think in the last couple of quarters you really targeted development that was going to be the primary method of deploying capital. And so as you kind of introduced the concept that I guess reintroduced more acquisitions and you said it's a small amount so I get that but you mentioned a quite a few times in the call how do we think about that relative to the development projects or the developments just coming along more slowly? Did some of those not materialize? Do you feel like you've got the CapEx that you can go out and deploy more? Can you kind of dive down that road a little bit further?

[George Doyle:]

Sure. On the acquisition side we're being selective on what we pursue versus the strategy. We had -- going back a couple of years ago where we were doing more of the drop-down acquisition approach where we're targeting larger portfolios. These are for the most part very selective, very accretive transactions. So we're not deploying a lot of capital but the acquisitions that we are completing are very accretive. So depending on what opportunities surface over the next couple of months -- or sorry next couple of quarters that's -- those are the acquisitions that we'd anticipate closing. On the development side, the development as we've mentioned before it's a little tricky to forecast for a number of reasons. The -- just working through the whole planning process, leasing process it takes time and things do shift around. But we've made a lot of traction and we've got a number of sites that are going to be coming online in the fourth quarter. So we're getting very close to transitioning that in a position where sites are going to regularly come online and come out of development stage.

[Dave Rodgers:]

Okay. Thank you.

[George Doyle:]

Sure.

[Operator:]

Thank you. And our next question comes from Liam Burke from B. Riley. Your line is open.

[Liam Burke:]

Thank you. Good morning, Tim. Good morning, George.

[Tim Brazy:]

Good morning.

[George Doyle:]

Good morning, Liam.

[Liam Burke:]

Tim in the last call you mentioned that there's been a lot of interest over and above your current projects with people developing FlexGrid. How do you look at balancing developing existing projects with attracting new opportunities with other partners?

[Tim Brazy:]

Well we are active in both right? So as George mentioned these projects are in various stages of deployment. So when you think about what development or construction project or program might entail there's identifying the opportunity, having the discussion with the strategic counterparty and the parties include not only the real estate owners, the fee owners, but the tenants. These are larger more complex deployment opportunities that means if there are a fair number of detail discussions about the customize solution that we're designing for the partnership, for the opportunities. So at any one point in time, we have a number of projects and discussions in the early phases. We have others that are in process where we've agreed on the scope and the scale of what we are going to be doing over the next 12 months to 24 months. And we have others where equipment has been ordered. There is permitting involved. We have a very specific deployment calendar related to individual sites. So it continues to grow and advance quarter-by-quarter. The more we do the more visibility we get, the more opportunity we have. And we see this as a very significant part of what we'll be doing over the next several years.

[Liam Burke:]

Okay. And just looking at your core portfolio again if I net out the JV contribution plus the sale of assets did it - did the rental revenue grow year-over-year on an organic basis similar to historic rates?

[George Doyle:]

Yes it did. Yes we've generally been running that 2%, 2.5% kind of organic growth rate on assets that we've owned for a period of time.

[Liam Burke:]

Great. Thank you, Tim. Thank you, George.

[George Doyle:]

Sure.

[Tim Brazy:]

Sure.

[George Doyle:]

Sure.

[Operator:]

Thank you. Our next question comes from Ric Prentiss from Raymond James. Your line is open.

[Ric Prentiss:]

Hey guys, I appreciate. Couple of follow-up questions, on the $1.7 million revenue that you sold who is the buyer? What type of buyer? Or who are they? And when did that close?

[Tim Brazy:]

We generally don't give the name of the counterparty. But it's the large institution that bought the portfolio from us. There's a lots of institutional interest in our asset classes. We've talked about that a bit in the past. There's certainly a lot of infrastructure money that's in the market at this point in time. And what was the last part of the question Ric, I'm sorry.

[Ric Prentiss:]

When did it close specifically like what day?

[George Doyle:]

Pretty close to the end of the quarter. It was in the last week of June.

[Ric Prentiss:]

Okay. All right. So didn't really have an effect on the 2Q numbers say in its annual meaningful size?

[George Doyle:]

That's correct. Yes.

[Ric Prentiss:]

Okay. And then as we think on your balance sheet going forward, how should we think about just a ballpark sizing of what kind of development CapEx should like to put to work in 2020 and beyond? Just thinking of pacing of that with the outdoor kiosks and the FlexGrid just even order of magnitude?

[George Doyle:]

Yeah, we haven't come out with our any, sort of, 2020 guidance. But I would say that the -- some of the projects that we have going on this year will continue to roll into 2020. So I would say it's going to be a similar level of spend as to what we're incurring at the moment absent new projects coming -- or getting to the point where we're actually going to be spending money on new projects.

[Ric Prentiss:]

And given the time line you're getting these things from signing to actually building that might not have as much. Are you still thinking kind of 12, 18, 24 months for some of these projects?

[George Doyle:]

Yeah. Varies on the project, but yes from start to finish I would say you're in that 12 to 24 months range.

[Ric Prentiss:]

Okay. Thanks.

[George Doyle:]

Sure.

[Operator:]

Thank you. And that does conclude the question-and-answer session for today's conference. I'd now like to turn the conference back over to Tim Brazy for any closing remarks.

[Tim Brazy:]

Great. Thanks very much. And thanks everybody for joining us this morning. As you can tell we're -- we continue to be excited about the opportunities we have in front of us. Things are taking somewhat longer and in some cases for some of our development initiatives to get the traction that we're seeing now. But we’re very confident that this will have a meaningful impact on the company as we work to continue to deliver growth at the partnership. And we will share more details with you on the third quarter conference call. And look forward to speaking with you then. Have a great day everybody.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a wonderful day.