Landmark Infrastructure Partners LP
Q4 2017 Earnings Call Transcript

Published: 15 Feb 2018

[Operator:]

Good day, ladies and gentlemen. And welcome to the Landmark Infrastructure Partners' Fourth Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode [Operator Instructions]. Later we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, today's conference is being recorded. I would now like to introduce your host for today's conference, Mr. Marcelo Choi, Vice President of Investor Relations. Sir, please go ahead.

[Marcelo Choi:]

Thank you, and good morning. We'd like to welcome you to Landmark Infrastructure Partners' fourth 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 the 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 to their most comparable GAAP measures. And with that, I'll turn the call over to Tim.

[Tim Brazy:]

Marcelo, thank you very much. Good morning. Today, we're going to discuss our fourth quarter results and provide you with an update on our operating activities, including our infrastructure initiatives and other developments at both the partnership and our sponsor Landmark Dividend. But before I get into the details of the fourth quarter, I would like to take just a moment to talk about this past year. 2017 was our third full year since our IPO, and we continue to make very significant progress growing the Partnership. This past year, we’ve achieved several milestones and continued our transition toward a more fully integrated real estate and infrastructure company. Since our initial public offering in November 2014, we've more than tripled the number of assets in our portfolio from approximately 700 at the IPO to more than 2,200 assets at the end of 2017. We’ve also increased our revenue by more than four times from approximately $13 million at the time of the IPO to over $50 million in 2017. Last year, we continued to execute our core ground lease business and our strategy of expanding our activities to real estate to the related infrastructure. We see enormous opportunities in this market to leverage our relationships and our growing portfolio of critical infrastructure assets to drive meaning growth across our entire platform. In our core business, we completed five drop down acquisitions, including the one ROFO dropdown that closed last month, along with a number of direct party acquisition, including $23 million of UK billboard assets with our European outdoor advertising joint venture partner. In total, from the beginning of 2017 through January '18 of this year, we've acquired 350 assets for total consideration of approximately $219 million. Those assets are expected to contribute approximately $16 million in annual rents and their characteristics are again consistent with our overall portfolio with 189 wireless communication, 145 outdoor advertising and 16 renewable power generation assets. At the end of July, we also completed a substantial reorganization of our legal structure, which moved the Partnership’s operating assets into a REIT subsidiary. This reorganization was a significant step forward in simplifying tax reporting for unit holders, and eliminating unrelated business taxable income. Allowing unit holders to freely purchase LMRK units without having to worry about generating taxable income sourced to states outside their own state of residency. This change was intended to broaden the Partnership’s investor base and really has been very well received. In 2017, we also announced the strategic Partnership with Ericsson to develop landmarks FlexGrid product, a comprehensive network connectivity and energy solution for owners of infrastructure in the telecom, smart city, transportation and utility industries. The response to this product has been very strong with a lot of interest from commercial property owners, transportation centers and municipalities and we expect that FlexGrid will be a key growth driver for partnership beginning in 2018. Turning to the fourth quarter. We had another strong of operating and financial results. Rental revenue growth of 27% year-over-year was driven by the acquisitions we completed in the last 12 months and the strong growth profile of the portfolio. Stable assets, predictable cash flows and increasing acquisition opportunities in our targeted markets, all continued to drive consistent growing quarterly results at the Partnership. With acquisition volume exceeding our target level for last year, we recently announced the distribution of $0.3675 per common unit for the fourth quarter, marking the 12th consecutive quarter that the partnership has increased its cash distribution since the IPO. We expect 2018 will be another strong year as well and we believe we're very well positioned to execute on our 2018 initiatives. Helping drive Partnership performance the pipeline of assets at the sponsor is strong in all three of our industry segments, and we're confident we can deliver meaningful growth through asset acquisition and infrastructure developments this year. In 2017, total acquisition volume at the sponsor increased by more than 20% year-over-year. Our strategic initiatives and the reorganization of our internal acquisition teams, both contributed to improved performance. And you can see one result of the strong production at our sponsor in the growing number of assets in the ROFO asset portfolio, plus the additional assets under management, which stood at approximately 900 assets as of January 31, 2018. This portfolio has continued to grow, notwithstanding the recently completed Fund H transaction in January of this year. Taking into account the 127 Fund H assets that were dropped down in January, the assets under management at the sponsor still represent approximately $24 million in annual rents or about 45% of the Partnership's 2017 revenue, assuming all of the assets in the portfolio were dropped down today. As we’ve mentioned on previous calls, we continue to pursue strategic partnerships that complement our existing ground lease business at both the Partnership and the sponsor. These new initiatives again, all part of our plan to extend our real estate into related infrastructure, are expected to drive significant asset acquisition and infrastructure deployment opportunities for the Partnership. Our priority is the Landmark FlexGrid product and we're making great progress as we advance our discussions with a variety of tenants and strategic partners. We’re currently targeting over 500 sites in various stages of development in 2018 across multiple engagements. We've broken ground on a number of locations in the rollout of our initial programs in 2017, and we expect to expand and develop a variety of new programs this year. Again, we see the FlexGrid product as the perfect complement to our ground lease business. It allows us to deploy infrastructure at scale. It's designed to address critical network efficiency goals through network densification and co-location, and we have the ability to provide customized solutions from major commercial and consumer customers. We expect the FlexGrid product will be a very significant ongoing source of growth for the Partnership. With regard to our European outdoor advertising joint-venture, the business has continued to grow and production has started to ramp up as expected. In 2017, we acquired 10 outdoor advertising assets in the U.K. for total consideration of approximately $23 million, and we anticipate acquisition volume will continue to grow this year as well. As we think about our successes last year and look forward to 2018, we believe the Partnership’s in a great position to benefit from the enormous market opportunity across all of our business segments. Our industries continue to grow significantly, driving more opportunity for asset acquisitions and the deployment of infrastructure. The increasing need to satisfy the virtually unlimited demand for data, whether for mobile, video or IoT, consumer or commercial use, will drive a world that’s increasingly being defined by data and the systems and infrastructure that support it. Our asset portfolio continues to perform exceptionally well, powering healthy organic growth in 2017, on both an overall and on a same side basis and economic conditions are favorable. Notwithstanding the recent increase in interest rates we've seen, they remained historically low, creating a positive macro environment for our business to expand. But most of all, our asset acquisition and development pipeline is the strongest it’s ever been in the history of Partnership. When you combine all these factors with our new initiatives, where real estate and infrastructure work together to serve our core industries, we believe that we are exactly where should be to deliver long-term growth and create significant value for our unit holders. And with that, I’ll hand the call over to George who will provide us with a more detailed financial review of the quarter. George?

[George Doyle:]

Thank you, Tim. Before I walk through the results for the quarter, I want to highlight that our presentation changed in the second quarter as a result of adopting new accounting standard on April 1, 2017. Beginning on April 1, 2017, for future acquisitions, we are no longer recasting our historical results for acquisitions from our sponsor. In addition, we are capitalizing acquisition costs for acquisitions that are not between entities and are common in control. During 2016, the Partnership completed five drop-down acquisitions from its sponsor and affiliates. These transactions were completed before the adoption of the new accounting standard with the historical financials of the Partnership adjusted retroactively as if the transactions occurred on a earliest date during which the assets were under common control. The reconciliation in our press release for 2016 separately presents our results of operations from those of the drop-down assets predecessor prior to our ownership during 2016. I want to focus my comments on the results in the columns labeled Landmark Infrastructure Partners LP in the reconciliation, which excludes the results of the drop-down assets predecessor prior to the date of the acquisitions during 2016. We generated rental revenue for the fourth quarter of $14.5 million, which is an increase of 27% year-over-year. The year-over-year growth is primarily due to the drop-down transactions and third-party acquisitions that we have completed since the fourth quarter of last year and organic growth from the portfolio. Our fourth quarter organic drop down was completed on December 20th and therefore contributed very little revenue during the quarter. Combined with the drop down that was completed on January 18, 2018, our first quarter revenue will more fully reflect the revenue run rate post our recently completed acquisitions. G&A expenses for the quarter were $1 million, before the reimbursement from our sponsor of $0.5 million. The G&A reimbursement from our sponsor is reflected as a capital contribution rather than as a direct reduction to our G&A expense. Our G&A expenses increased year-over-year, primarily due to higher professional service fees. Adjusted EBITDA, which excludes several non-cash items, including unrealized gain on derivatives and acquisition-related expenses, increased to $14.1 million for the fourth quarter, an increase of 29% year-over-year. During the fourth quarter of 2017, we reported an income tax benefit of $3.2 million. During the quarter, we reduced our valuation allowance on our net deferred tax asset and recorded an income tax benefit for Federal and State income taxes. Although, we reduced our valuation allowance on the deferred tax asset, we are not yet generating current Federal or State income taxes. The reduction in the valuation allowance was not a result of the recent tax law changes. Regarding the recent tax law changes. We believe that they’re generally favorable to us. Specifically, the recent tax reform provides 20% deduction for re-dividend income and MLP Partnership income. We ended the quarter with 2,157 leased tenant sites out of the total of 2,239 available tenant sites, and the occupancy rate for the quarter remained at 96%. We continue to see very little churn in our portfolio, and we expect this favorable trend to continue over the course of 2018. In addition, we are seeing significant tenant modification activity on existing sites and additional lease up opportunities. The MNOs have started to upgrade equipment for 5G deployments, as well as the rollout of new sites for densification. In November, we closed our $80 million outdoor advertising securitization transaction, which included $16 million site acquisition account. The securitization allowed us to refinance borrowings under our revolving credit facility at an attractive fixed rate. On January 18, 2018, we used the net proceeds in the set acquisition account to partially complete the Fund H dropdown. This securitization is the first outdoor advertising ground lease securitization, and demonstrates the high quality of the assets and our ability to secure attractive financing. We finished the quarter with $304 million of outstanding borrowings under our revolving credit facility. For 2018, we will continue to execute on refinancing activities to maintain availability under our revolving credit facility. Refinancing markets remained attractive and we expect rates throughout 2018 to approximate the rate under our revolving line of credit. On January 24th, the Partnership announced its fourth quarter cash distribution of $0.3675 per common unit or $1.47 per common unit on an annualized basis. This quarter’s distribution represents 5% increase year-over-year. The distribution increase was in line with the mix of acquisitions and developments, completed through the first part of January. Our coverage ratio, which is defined as distributable cash flow divided by distributions declared on the weighted average common and subordinated units outstanding during the quarter, was 0.86 times in the fourth quarter. The coverage ratio this quarter was impacted by several factors, including the timing of capital raises and deployment of capital. As I previously mentioned, our dropdown for the fourth quarter was completed in the second half of December and contributed very little revenue during the quarter. And a larger concentration of the $10 million of capital raised under the ATMs during the fourth quarter occurred in the first half of quarter. In addition, a handful of our larger assets that we have acquired and our FlexGrid development have not yet commenced generating revenue. The annual revenue expected from these assets is expected to be approximately $1 million and we’ll commence at various times over the course of 2018. We expect our coverage to improve with the revenue from the acquisition completed in December and January, including the Fund H dropdown transaction, driving higher revenue in the first quarter of 2018. Turning to our guidance for 2018; we expect acquisition volume and development spending in the range of $250 million to 300 million; we anticipate new development spending at approximately $50 million for 2018 as we continue to make progress on the growing initiatives in the pipeline. As part of our guidance, the Partnership sponsor intends to offer us the right to purchase between $200 million and $250 million of assets in 2018. As I indicated earlier, we expect our financing cost in 2018 to remain attractive and approximate the rate on our revolving line of credit. These acquisitions and developments, combined with organic portfolio growth, are expected to drive distribution growth of 10% over the fourth quarter of 2017 distribution of $0.3675 per common unit by the fourth quarter of 2018. We will now take your questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of Dave Rodgers with Baird. Your line is now open.

[Dave Rodgers:]

Wanted to go back to your guidance that you gave early November, I think November 2nd the last time you ended up reporting, and you talked about $200 million of acquisitions in the year and you had also given guidance at that time of the 10% dividend increase for the fourth quarter. So I guess help me between then and the decision making that you guys have had over the last three months, what made you decide not to make those acquisition. And frankly, why didn’t you increase the dividend more. And again, I wanted to go back one more thing on the dividend. You talked that the dividend increase was consistent with the returns on the assets that you closed year-to-date in '18. And I want to understand that better. So a little long winded, but if we can start there.

[Tim Brazy:]

The fourth quarter was a very busy quarter for us. We have a lot of different things that were coming together in the fourth quarter. We had to complete couple of financings, one of which we completed, one of which has pushed out until the second part of February. Based on the different pieces that we're moving around in the quarter, the mix of what we acquired shifted between what we were anticipating. We were going to acquisition at the time we had our last call and then what we actually closed. The fund drop downs tend to be less accretive than what I would call organic acquisitions or drop-downs. Those tend to be a bit more accretive. So some of our transactions, the more accretive transactions, had shifted out into the first and second quarter of 2018, and we changed our approach for the quarter and did a drop-down of some of the ROFO assets, Fund H specifically. So there's a number of things that shifted around in the fourth quarter that caused the level of accretion we were able to drive to change fairly significantly. So we're mindful of the coverage on the distribution. We want to increase our coverage fairly, significantly from where we are today, make sure that we're covering with some cushion. And we didn't think that given the mix of what we're ultimately able to acquire in the fourth quarter that it was prudent to raise the distribution more than 5% for the year.

[Dave Rodgers:]

As you look at ‘18, I think your $250 million to $300 million acquisition guidance includes $50 million of organically sourced product. Is that going to be FlexGrid development or is that going to be cash flowing assets similar to what we’ve seen in the past?

[George Doyle:]

So out at the guidance, the $50 million of developments are predominantly going to be FlexGrid type deployments. So they will occur a little bit more heavily in the second half of the year. We're working on a number of contractual arrangements at this point in time to basically give the green light to start in those developments. The developments that we're targeting for this year are expected to be more accretive than what we've targeted in 2017. So the spend will start to ramp up a little bit in the second quarter, it’d be fairly heavy in the third and fourth quarters, and that's the quarters that some of the revenue will start appearing in financial statements.

[Dave Rodgers:]

And then last question from me, taking all the fund raises that you did and then the one you said that drifted into February. What is your total capacity today enterprise wise do you think, George?

[George Doyle:]

Our capacity today is I would say on the lower end of what we typically have. It's more in the call it $30 million, $40 million in acquisition range. So likely the approach for 2018 will be we’ll raise some capital with issuing units with our UEP program. We've definitely seen a pick-up in interest in activity for basically stock acquisitions. We will likely have a little bit of ATM activity over the course of the year and then potentially preferred type offering as well. To comment on the common side, may have some ATM activity and we may issue some units either in a private fund or ROFO asset dropdown, or potentially issue some units in an acquisition from the sponsor. We don't really have any plans at this point to do another common offering.

[Operator:]

Our next question comes from the line of Ric Prentiss with Raymond James. Your line is now open.

[Unidentified Analyst:]

This is [indiscernible] on for Ric. Two if I may. You said there’s going to be some -- about $1 million of revenue from assets that you’re currently generating. What would trigger that revenue to start generating for you guys?

[Tim Brazy:]

I would say out of the million there's two components, a little over half of it is related to outdoor advertising. So basically billboard structures the construction need to be completed. We're not involved in that construction activity, but the tenant needs to effectively -- half the board completed and then revenue will commence on the ground lease. That should take call it three to six months for that type of activity to complete. And then the second piece of it is the leases on some of the FlexGrid deployments that we’ve started to spent money on. Those leases won’t commence until likely the second half of the year, they won't start actually generating revenue.

[Unidentified Analyst:]

And then one more if I could. Nice to see the 150 properties in Canada. Are you guys looking to do one site per property or multiple sites per property and then how should we think about the deployment of that contract?

[George Doyle:]

So that likely will be one site per property, and we may not develop all 150 sites. We have a lot of interest up in Canada similar to what you see in the U.S. carriers and MNOs they need to upgrade equipment, they need densify networks, so similar type activity. So we’ll provide more updates on our progress in Canada, but it's good for step first. It's one of our first larger FlexGrid contracts or deployments, and we have number of other projects that are in process. So hopefully, we have some more announcements over the course of first and second quarter, but we definitely had good reception in our program with not only the MNOs but also with real estate owners. We've got basically attractive proposition for development.

[Operator:]

[Operator Instructions] Our next question comes from the line of Mike Gyure with Janney. Your line is open.

[Mike Gyure:]

Can we talk a little bit about, and I think maybe you touched on it in some of your comments on some of the environment for the renewals and what you're looking at as far as price increases and things like that with some of the telecom guys.

[George Doyle:]

We actually don’t have that many assets that are renewing at the moment. And most of our renewals are typically going to be pretty close to the existing rates on the assets, where we tend to see a little bit more uplift in the lease arrangements or when additional equipment has been added to the sites. As I did mentioned in some of the earlier comments we are seeing very strong retention rates with the tenants. We still have 99% plus renewal rates on sites and we do see lot of activity in the market, so we're optimistic that in 2018 we’ll see a little bit more lease up activity than what we've seen in the last, I would say, two to three years.

[Operator:]

Our next question comes from the line of Jon Atkin with RBC. Your line is open.

[JonAtkin:]

So on the last point, is there anything that you did primarily rooftops or is there anything in terms of your ground rights that would lead to faster than expected growth in terms of leasing, it’s just rooftops. Is that correct?

[Tim Brazy:]

It's mostly rooftops. We have a very small percentage of tower sites that have a rev share provision. I wouldn’t expect that to move the needle at all for us. But yes, mainly all our rooftops where we're seeing a lot of activity.

[JonAtkin:]

And is there any way to just remind us what exposure you may have to projects that are being talked about in the market or any industry around rent reduction and relocation. So specifically for rooftops, a company called Lane Lease, put out a press release and they’re working to Sprint to try to optimize rents. And it doesn’t sound like you’ve really seen this impact from that. But any color or perspective views on that that I would be interested.

[George Doyle:]

We know Lane Lease is out in the market. We’re not entirely sure what their strategy is yet. What we’ve generally done with our portfolio to mitigate potential exposure to relocations is we generally have stayed away from higher rent sites. The rents that are significantly above market in an area where you have alternatives for relocation are potentially relocation candidates, because you could save enough relocating on your -- essentially your rooftop rent, such that it will recover all the cost to move. We think for the most part what they're doing is not going to have a significant impact on us. In fact, what they're doing is not really new in the industry. There has been a number of groups that have done this over at least last 10 years, if not 15 years. So this is not a new concept. We rarely get impacted by these type of activities, because our rents are reasonable, if not -- in lot of cases below market where you can't justify moving the site, and we're not open for rent reductions. We believe we take reasonable approach to rents with our tenants and we don't press them or gauge them when we have opportunities, we try to be fair. So we don't think that a lot of our portfolio would be exposed to relocations.

[Tim Brazy:]

There actually maybe a modest benefit, because we have lower rent sites where tenants relocating may come onto our rooftops, not leave our rooftops.

[Operator:]

I'm not showing any further questions at this time.

[Tim Brazy:]

Great. Well, thank you all for joining us today. We appreciate the time. And as you can tell, we have some very exciting opportunities in front of us. We're confident in our ability to take full advantage of the market in all of our business lines and we're looking forward to continuing our strong start to the year and sharing continued progress with you next quarter. Thank you again.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone, have a great day.