Landmark Infrastructure Partners LP
Q1 2018 Earnings Call Transcript

Published: 2 May 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the Landmark Infrastructure Partners’ First Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, there will be a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to 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’ First Quarter Earnings Call. Today, we will share an operating and financial overview of the business, and we will 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 would 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 partnerships’ earnings release and documents on file with the SEC. Additionally, we may refer to non-GAAP measures such as EBITDA, adjusted EBITDA and distributable cash flows during the call. Please refer to the earnings release and the public filings for definition and reconciliations of these non-GAAP measures with their most comparable GAAP measures. And with that, I’ll turn the call over to Tim.

[Tim Brazy:]

Marcelo, thanks very much. Today, we’re going to discuss our first quarter results and give you an update on our operating and financing activities, including our infrastructure initiatives, our markets and other developments at both the partnership and our sponsor Landmark Dividend. In the first quarter, we’re continuing to execute on our core strategy and had another strong quarter of operating and financial results. Rental revenue grew 33% year-over-year, driven by the acquisitions we completed in the last 12 months and the strong growth profile of our portfolio. The stability of our assets with their predictable high-quality cash flows and the increasing acquisition opportunities in our target markets, all continued to drive consistent, increasing quarterly results at the partnership. Our asset portfolio has performed very well since our initial public offering and also year-to-date, driven by the stable organic growth from contractual lease escalators and the very low churn we’ve experience. We had a busy quarter of acquisitions and financing activity led by the previously announced $60 million ROFO transaction that closed in mid-January. Year-to-date, through March 31, 2018, we’ve acquired 160 assets for total consideration of approximately $85 million. Those assets are expected to contribute approximately $6 million in annual rents. And we’re comprised of 50 wireless communication, 103 outdoor advertising and 7 renewable power generation assets. With regard to financing, in early April, we raised net proceeds of approximately $47.5 million by issuing our Series C preferred units, which will provide continued financial flexibility for the partnership by reducing the balance of the partnerships’ revolving credit facility. Turning to the activity and our sponsor. LMRK’s pipeline of assets remains very strong. Closed acquisitions in the first quarter increased 23% year-over-year, and signed acquisition contract volume increased 34% year-over-year. We continue to target higher cap rate assets that can drive accretion that LMRK currently, as the dropdown from the sponsor or directly acquired. The market for these assets remains very strong, and we see continued significant opportunity to acquire attractively priced assets for the partnership. As a result of the increasing production at our sponsor, the ROFO asset portfolio, plus the additional assets under management continues to grow, even after the ROFO portfolio acquisition of 127 assets was completed by the partnership in mid-January. As of March 31st, the ROFO asset portfolio, plus additional assets under management, stood at approximately 950 assets. These assets under management at the sponsor still represent approximately $25 million in annual rents or approximately 47% of the partnerships’ 2017 revenue, assuming all of the assets in the portfolio were dropdown today. Turning to our Landmark FlexGrid product. We’re currently working on several projects with the number of strategic partners, tenants and property owners, including municipalities as part of their smart city initiatives, commercial property owners, who have attractive real estate locations and transportation authorities who would like to provide access to connectivity for the riders. While we’re not quite ready to announce any definitive agreement today, we expect to finalize and announce some of these pending yields shortly, and we’ll provide periodic updates on our progress throughout the year. We’re currently working on several programs and deployments, and we’ve broken ground on multiple locations. Our pipeline for the FlexGrid product continues to expand, and we’re excited about the many opportunities were developing. We expect the FlexGrid product will be a very significant ongoing source of growth for LMRK. With regard to our European outdoor advertising joint venture, we continue to make progress with our partner in identifying attractive outdoor assets to acquire in the UK, and we’re making progress evaluating other Western European countries. Looking ahead to the remainder of this year. We’re encouraged by the strong pipeline of assets available to us to grow our core ground lease business. Assets are available and attractive cap rates, which we expect will be currently accretive to the partnerships’ distributable cash flow. The underlying industry segments that we target continue to be well position for growth, with very significant opportunities in particular in the wireless communication market. Within that segment, domestic wireless capital expenditures are expected to increase substantially, driven by the need for network densification and the deployment of 5G and IoT technologies. These are massive industry initiatives that we believe will lead to many opportunities for lease modifications and further site leasing for the partnership as the carriers add to, upgrade and enhance the equipment on existing and new sites. This additional activity from network densification and deployment of 5G also stands to benefit our FlexGrid offering. Remember, FlexGrid is specifically design for network densification and tenant colocation. The FlexGrid has been very well receive, and as carrier look to accelerate their deployments, we believe our solution will allow us to leverage our substantial real estate portfolio and relationships driving higher growth at the partnership. In terms of recent industry developments, the potential merger between Sprint and T-Mobile is again front and the center, given Sunday’s announcement. As we discuss before, we don’t believe the transaction would have much of an impact on our business In considering the impact of a potential deal, there are several things to keep in mind. First of all, the merger faces significant regulatory hurdles. We expect that it will 12 to 14 months for regulators to review and approve a final transaction infer to close. Assuming that happened, the actual combination would take years to complete, and any effects from any site decommissionings or portfolio reconfigurations would be significantly mitigated by the fact that the partnership's portfolio itself will continue to grow and diversify during that time. For example, when T-Mobile bought out MetroPCS, it took years from Metro to be fully integrated, and that was a much, much smaller transaction. Given the size and complexity of the proposed merger between T-Mobile and Sprint, we expect the rationalization of the networks will take much longer and be more complicated. Second, as we said in the past, there’s only a limited amount of direct site overlap across the entire landmark portfolio. In total, about 5% of our revenues might be potentially affected by the direct T-Mobile-Sprint site overlap or about two years worth of lease escalators on our portfolio today. And just because the overlap exists, it doesn't necessarily mean that the partnership will lose 5% of its revenue. As the new T-Mobile-Sprint combination would need to reconfigure the existing networks into a common network platform, there’d be significant offsetting lease modification income and additional revenue opportunities as the resulting platform is upgraded. You will see more of an impact on rural or single tenant sites, where the partnership has a very small exposure today. Finally, the organic growth from our contractual escalators and ongoing asset acquisitions will also help offset any effects from a potential merger. With regard to the outdoor advertising industry. Outdoor advertising today remains one of the most cost-effective means of advertising, with its market share stable and increasing. The continuing shift from static to digital billboards stands to benefit LMRK both directly and indirectly - directly as a number of our outdoor advertising leases allow us to participate in additional ad revenue generated by the billboards, which is exactly what you'd expect from the static to digital converters. Also as the digitalization billboards continues, advertisers are now designing digital advertising campaigns that align both outdoor advertising and mobile Internet advertising channels together. The ongoing digital conversion in the outdoor industry is looked in surge and data analytics that are highly valuable to advertising firms and their customers. These trends point to long-term value proposition of outdoor advertising as it becomes an integrated and more measurable parts of the advertising mix. Lastly, solar and wind continue to be an increasing source of energy in the US with power generation from these sources expected to more than double in the next 30 years. Landmark continues to target assets in this segment, especially on the solar side, which provide high-quality revenue streams backed by long-term power purchase agreements, with investment grade-rated utilities. We expect the continued growth in this sector will give LMRK a significant opportunity to acquire very attractive renewable power generation assets. Overall, we believe the fundamentals of our business are as strong as they've ever been. Our markets are large, healthy and continue to grow. Acquisition opportunities are plentiful. We have access to a variety of capital sources that provide us with the financial flexibility we need to grow our business. And we’re well position to execute on our 2018 goals. As we continue to execute on our strategy, we see tremendous opportunity ahead, and our focus is on running the business to deliver long-term value for our unitholders. And with that, I’ll turn the call over to George, who will provide us with a more detailed financial review of the quarter. George?

[George Doyle:]

Thank you, Tim. During the first quarter, our portfolio continued to perform very well. Rental revenue in the first quarter increased 8.4% over the fourth quarter of last year, driven by the assets acquired in the ROFO asset acquisition in January 2018 and to a lesser extent the remaining acquisitions for the quarter; a site from the ROFO asset acquisition in January. Most of the remaining assets were acquired by LMRK in March. In addition, we have one lease in the renewables segment with annual revenue of approximately $1.50 million, where revenue is not recognized evenly during the quarter. During the first quarter, we recognized only $50,000 of revenue from this asset and expect to recognize the remaining million mostly over the later part of 2018. As we have discussed on our calls over the last several quarters, we have been focusing on changing the mix of our acquisitions to target acquisitions with higher cap rates. The assets acquired historically, including in Q1, are accretive not only on a long-term basis but also on a current basis. The average cap rate for acquisitions in Q1 was approximately 7%. G&A expenses for the quarter were $1.7 million before the reimbursement from our sponsor of $1.2 million. The G&A reimbursement from our sponsor is reflected as capital contribution rather than as a direct reduction to our G&A expense. Our G&A expenses increased year-over-year, primarily due to the timing of professional service fees and state return filing fees. We expect to see G&A expenses decline during the remainder of 2018. Adjusted EBITDA, which excludes several non-cash items, including unrealized gain on derivatives and acquisition-related expenses, increased to $15.5 million for the first quarter, an increase of 35% year-over-year. We ended the quarter with 2,309 leased tenant sites out of the total of 2,395 available tenant sites, and the occupancy rate for the quarter remained at 96%. As we discussed on the call last quarter, we anticipate minimal churn in our portfolio over the course of 2018. We finished the quarter with $344 million of outstanding borrowings on our revolving credit facility. On April 2, we closed our Series C preferred unit offering with net proceeds of approximately $47.5 million. The Series C offering was a bit unique. So let me take a minute and walk you through our thinking behind the transaction. In June of 2017, when interest rates were extremely low, we executed a $50 million forward-starting swap and LIBOR that fix LIBOR beginning in March 2018. We executed the interest rate swap in anticipation of additional financings. As interest rates have risen, our revolver is no longer our cheapest source of debt financing. Over the last six months, we have been working on refinancing balances on our revolver for other fixed rate financings. We completed our fixed-rate outdoor financing in November 2017 and our fixed-rate renewals financing in April 2018, both at attractive rates. As we continue to refinance balances on our revolver, we determine that we would not need to swap executed 2017 to hedge interest rate exposure on our revolver. As we look at capital alternatives for 2018, a variable-rate convertible preferred structure fit well with our swap that began in March 2018. We were not willing to issue common units as we felt that common unit issuance would be overly dilutive. The convertible preferred offering allowed us to issue units with a lower current coupon and a conversion price into common units that was 15% higher than the price of our common units at the time of pricing of the offering. Although the convertible preferred units priced at 7% floating rate, since our swap rate was below the current three-month floating LIBOR rate, we effectively fixes this issuance at closer to 6.7%. With the closing of this capital raise, we have raised the majority of the capital needed to meet our 2018 acquisition guidance, with the more attractive cost of capital. In addition, upon completion of our next financing, substantially all of our debt will be fixed rate or hedged through interest rate swaps. With the Series C preferred equity offering and renewables financing completed, we have reduced our revolver balance to $268 million as of April 24, 2018. As I mentioned on our last call, we continue to focus on refinancing balances on our revolving line of credit. The refinancing markets are attractive, provide better long-term financing options than our existing line of credit. The secured financings also spread out the maturities of debt, which mitigates our exposure to rising interest rates and refinancing risk. On April 19, the partnership announced its first quarter cash distribution of $0.3675 cents per common unit or the $1.47 per common unit on an annualized basis. This quarter, we made the decision to keep the distribution flat relative to last quarter. The performance of our portfolio has been very strong. But as we have been rapidly growing, we have not always matched the timing of the capital raised with the deployment of that capital. We plan to keep the distribution flat in 2018, until the revenue reported from our investments catches up with the distribution declared. Based on the expected performance of our portfolio, our pipeline of acquisitions and our development activities we continue to expect to drive distribution growth of 10% by the end of 2018. We will now take your questions.

[Operator:]

[Operator Instructions] Our first question comes from Rick Prentiss with Raymond James. You may begin.

[Rick Prentiss:]

A couple of questions. First on the $85 million of, I call it, CapEx, how much was FlexGrid and how much was acquisition within the $85 million?

[George Doyle:]

That was a 100% acquisitions. We didn’t include any of the funds that we’re spending on FlexGrid that number.

[Rick Prentiss:]

Okay. How much did you spend on the FlexGrid in the quarter?

[George Doyle:]

It is approximately $10 million, roughly.

[Rick Prentiss:]

Okay. Because I think, maybe some prior quarters, you’ve included it just to be helpful and just kind of be able to clarify kind of FlexGrid versus other. So I guess that implies that your cap rate in 1Q, am I doing the math right, about $7.1 million from the acquisitions?

[George Doyle:]

Yes.

[Rick Prentiss:]

Okay. And as you think about your targeting for the year to do $200 million to $250 million of acquisitions, how should we think about what kind of cap rates you’re going to see in that area? You mentioned targeting more accretive ones. How should we think about what the annual target cap rate might be for 2018 on the guidance?

[George Doyle:]

Sure. We think, on the acquisition side of the guidance, it’s going to be around 7% cap rate. The composition of that may include some ROFO assets, where we would issue units in the acquisition, and some of that maybe direct purchases. But the acquisition cap rate should be roughly about 7%. On the development side, that’s where we’re targeting higher cap rates. We think the cap rate on the developments would be in the high single digit to low double digit, depending on how we execute and leasing-related activities on those developments.

[Rick Prentiss:]

Right. And there could be a little bit of pause between spending the money and getting the returns, given that they are development, I guess?

[George Doyle:]

That’s right. We do think the returns will come fairly quickly, but I’m not sure that you’ll get all the way up to the high single digit or low double digit within, I’d say, 3 to 6 months after the project is completed. But we are expecting to hit those returns pretty quickly.

[Rick Prentiss:]

Okay. And then last one is the big one. Obviously, there’s been a lot of consternation out there about your ability to continue to grow the distribution and some school of thought being fanning the flame out there that you might have to cut your distribution per unit. How do you feel about those thoughts? But then also, the 10% goal that you’ve said. You’ve said that previously in other years as well and not made it. So I’m just trying to think how realistic the 10% is and then how firm the no cut is.

[George Doyle:]

Sure. Based on the acquisitions we’ve completed today, where our portfolio is performing, we are very comfortable with the distribution at its current level. There is no thought and there have been no discussions about cutting distributions. The challenges I mentioned earlier is lining up to the capital precisely with the acquisition such that the coverage is there immediately when you raise the capital. So there’s been some time delays there and we expect, as you move through the course of 2018, had we not raised additional capital and continue to grow the company and trying drive more growth, that you just would have naturally seeing coverage on that distribution. So it doesn’t give us any concern about the current level the distribution. We did decide to keep it flat, though, until that revenue catches up just to demonstrate that we can cover that distribution.

[Rick Prentiss:]

Okay. And so the 10% you haven’t made it other years, what gives you the comfort that this year you will make the 10%? And why so firm on that number?

[George Doyle:]

Sure. Our ability to, I would say, drive distribution growth really depends on two factors. One is access to capital and the other is the rate at which we’re able to acquire assets. The organic growth of the portfolio is pretty consistent. So that’s going to always drive a little bit distribution growth we think in that maybe 3% to 4% range, but the rest of it really comes from being able to access capital and being able to acquire assets. We have shifted what we’re targeting over the last two to three years. Previously when we first went public, we were targeting a lot of the assets that had really nice profiles, but frequently in the kind of low 6 cap rate range, which don't drive a lot of accretion. And to the extent we actually go raise capital to acquire those, that became a little bit challenging. However, we have targeted a different set of acquisitions. We've changed our focus a little bit. And then also we have started to execute on the development activities. So the cap rates at which we’ve been acquiring over the last, say, 6 to 12 months has certainly increased, where it now will derive more accretion than what we saw in the earlier years, just going back two, three years. And that certainly, the development activities are very accretive. So certainly get low double-digit cap rates are potentially higher over time as well, where that certainly is going to be much more accretive relative to our cost of capital. We also, with the capital raise that was completed during April, that also helped solidify our cost of capital for the year and will help us better manage the accretion that were going to drive for the remainder of 2018.

[Operator:]

Thank you. Our next question comes from Mike Gyure with Janney. You may begin.

[Mike Gyure:]

Can you just talk a little bit -- I think you talked about the FlexGrid, how much you’ve invested in the quarter and kind of where we are at [Indiscernible]. It sounds like, if my math is correct, $18 million to $20 million. How much more cap rate you require on that front? Or how much you’re planning on investing maybe for the remainder of the year regarding the FlexGrid products.

[George Doyle:]

Sure. We’ve been making great traction with that program, and we’ve got a number of projects are currently in various stages. So we announced the arrangement we entered into up in Canada for nearly 200 sites. We have a number of initial sites that have been built. They’re not quite complete. They’re going through their final stages of permitting. So those will be coming out of development here pretty quickly. We’ve got some different city initiatives that are moving forward as well, where we expect to start actually putting some holes on the ground. And then we also have an expected transportation project. So we’re making good progress on the three areas that we’re focus on. And we’ve spend a bit of capital to-date mostly on some of the initial development activities, taking a few polls on the ground. And then a bit of the rest of the capital is inventory for the rest of this project as they come online. So looking at the full year, we’re still thinking we’ll spend roughly about $50 million in capital, and that will be in addition to what we had spent at the end of last year. You’re right on your number. We have spent roughly about $18 million to-date, and we do expect that start to pick up more in Q2 and have a higher spend run rate in Q3 and Q4.

[Operator:]

Our next question comes from Liam Burke with B. Riley FBR. You may begin.

[Liam Burke:]

George, in terms of, you mentioned the capital deployment, or the deployment of the FlexGrid. Could you give us a sense as to, on the rental side, what kind of customer commitments you have on that build-out?

[George Doyle:]

Sure. We are in process of finalizing those. The plan is, essentially they have an initial contract in place. There can be a typical 5-, 10-year non-cancelable type of contracts. And then we plan to follow on tenant in these structures as well, which we're in negotiations with a number of tenants for that follow-on position as well.

[Liam Burke:]

So I mean, if I’m looking at year-end 2018, you have a deployment of x number of sites both to the US and Canada. Out of that number of expected deployments, what percentage of those will have committed customers -- committed tenants on those sites?

[George Doyle:]

Well, I would think 97%, 98%. Aside from building a couple, just to show what the infrastructure looks like, these are not going to be built without tenant commitment.

[Liam Burke:]

And on the rental income growth for the quarter, there were acquisitions in there. Could you give us a sense as to what the contractual rent increases contributed to the growth?

[George Doyle:]

Sure. They’ve been, over the last, I would say, last two years, they’ve been very consistent with the organic growth rate in the leases themselves. So they’ve been running roughly in that 2.5% range for organic growth.

[Operator:]

[Operator Instructions] Our next question comes from Dave Rodgers with Baird. You may begin.

[Dave Rodgers:]

George, I wanted to talk a little bit about cost of capital. You said I think in your comments was 7% acquisition in the first quarter was accretive initially and kind of long term. So I’d kind of like to go through that. I have a weighted average cost of capital much higher than the 7% that you’ve been investing at. And I just wanted also dive that into maybe Rick’s question. When you look at your distributable cash flow coverage this year, I think given everything your settlements calls probably about 0.75 time by the time you get to the end of the year, so I guess why is it that dividend cut is not on the table or that the dropdowns from the sponsor haven’t been renegotiated to substantially higher levels? Or you just kind of avoid those for now, obviously given the fact that we’re not getting closure to any dividend coverage.

[George Doyle:]

Sure. I’m not sure as exactly how you get to the 0.75 times of coverage level. But when we look at our cost of capital, we look at it on a current and long-term basis. It depends where the common stock is trading. That will certainly drive that component. The cost of debt capital is still very attractive. So when we look at the combination of the two, we get a cost to capital that's less than 7%. So those are accretive. If we finance them entirely with equity capital, then, yes, we tend to agree that they would not be accretive on a current basis, but its combination of the debt and equity costs. That’s the way we look at it.

[Dave Rodgers:]

And so, I guess, are you thinking about the equity cost at 50% of each investment? And if so, kind of where do you think equity costs are today for you guys?

[George Doyle:]

Yeah, we do think of it at roughly about 50%, but it depends also on the returns on the investment. I mean, if you were targeting 6to 8 times leverage in your acquiring or developing assets in the high single-digit, low double-digit range on a kind of stabilized basis, those would use less than 50% equity. Some assets may very well be in the mid-teens cap rates as well. Which certainly imply you’re not using much equity as well for those type of developments. But yeah, we look at it assuming roughly about 50% debt and equity for acquisitions.

[Dave Rodgers:]

And then what’s your total capacity today? I think if you really raised enough to do the acquisitions for this is year, is that essentially kind of the remaining capacity today.

[George Doyle:]

Yeah. So with the offering, I would say, that gives us roughly about $100 million of acquisition, development-type capacity, we've completed call it $85 million or so of acquisitions to-date. And then as I mentioned, we could certainly issue units for some acquisitions, and we have our kind of ATM programs. We also have our UEP program. So just a combination of different sources will probably fill out the remainder for the year.

[Operator:]

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

[Tim Brazy:]

Thank you. As George and I said, we’re confident in our ability to take full advantage of what we think is a really tremendous market opportunity for the company. We will continue to execute on our business plan for this year, and we’ll share progress on the new initiatives with you as we can. We appreciate your time this morning, and we’ll speak to you next quarter's.

[Operator:]

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation, and have a wonderful day.