Landmark Infrastructure Partners LP
Q3 2016 Earnings Call Transcript

Published: 6 Nov 2016

[Operator:]

Good day, ladies and gentlemen, and welcome to the Third Quarter 2016 Landmark Infrastructure Partners Earnings Conference 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. [Operator Instructions] As a reminder, today’s program is being recorded. I would now like to introduce your host for today’s program Marcelo Choi, Vice President, Investor Relations. Please go ahead.

[Marcelo Choi:]

Thank you and good morning. We'd like to welcome you to Landmark Infrastructure Partners third 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. 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 Partnership's 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 flow during the call. Please refer to the earnings release and our public filings for definitions and reconciliations of these non-GAAP measures to their most comparable GAAP measures. And with that, I'll turn the call over to Tim.

[Tim Brazy:]

Thank you, Marcelo and good morning everyone. We appreciate you all joining us today as we present and discuss our results for the third quarter results and update you on the operating activities at the Partnership and our sponsor Landmark Dividend. Overall we’re very pleased with this quarter’s operating and financial results. Growth in this quarter has been strong and was driven primarily by the various acquisitions we completed within the last 12 months and the organic growth from the current assets in the portfolio. To position the Partnership for future acquisitions, we’ve continued to selectively access the capital markets, successfully completing two preferred unit offerings and a securitization transaction earlier in the year and a recent common unit offering that closed in October. The third quarter in particular was very busy for the Partnership. We raised capital to deploy in a number of accretive acquisitions we’ve already completed. And to better position the Partnership to execute our growth strategy as our sponsor continues to build an attractive pipeline of assets for future drop-down transactions and direct third-party acquisitions. In August, we closed our second preferred unit offering, issuing 7.9% Series B preferred units resulting in gross proceeds of approximately $46 million, including the full exercise of the underwriters’ over-allotment option. Similar to the earlier preferred unit offering in April, the Series B issuance in August increased our financial flexibility and our capacity for additional drop-down acquisitions. In October, we completed a public offering of common units, raising gross proceeds of approximately $56 million. And as the market allows, we continue to opportunistically raise capital through our common unit and Series A preferred unit ATM programs. The capital raised through these programs has helped finance our acquisition activity and put our balance sheet in a better position to take advantage of many opportunities we see in our market. In terms of acquisitions, during the third quarter we announced three separate drop-down acquisitions including the largest ROFO drop-down acquisition to date. And we also acquired a handful of assets in direct third party acquisitions. These combined acquisitions were comprised of 519 assets for total consideration of $125 million in cash and $65 million in common units issued in private placements. In total, we acquired 285 wireless communication assets, 181 outdoor advertising assets and 53 renewable power generation assets. As in all prior acquisitions, these acquisitions were also immediately accretive to distributable cash flow. And these acquired assets are similar to and compliment the already attractive characteristics of our existing portfolio, featuring 100% occupancy rate and average contractual lease escalator of approximately 2.5%, tier 1 tenancy of approximately 85% and aggregate remaining real property interest term of 80 years and a lease term of 20 years and a very broad geographic mix. In addition to the more traditional drop-down transactions, we’re also seeing more direct acquisition opportunities including the Recurrent transaction which we closed at the end of October. The Recurrent transaction was a significant milestone for the Partnership. It was our largest direct third-party acquisition to date, and more importantly was our largest solar transaction indicative of our ongoing commitment to the renewable power generation industry. As we’ve discussed in the past, the renewable power generation segment is an important area of growth for the Partnership. And the assets we target here are very attractive, its large utility scale solar projects with stable rental income derived from long-term power purchase agreements from high-grade utility off-takers. The projects themselves and the related infrastructure which includes transmission lines and interconnects are major projects requiring significant capital investments. We believe our assets represent an essential value component of the overall project and benefit greatly from an extremely favorable rental income to project revenue ratio of typically 10% or less. An indispensable but relatively small component of the renewable project provides us with highly stable and consistent source of rental income. With regard to the ongoing market opportunity for the Partnership, renewable power generation is the smallest segment of our business at approximately 15%. With the number of solar tenant sites available to us anticipated to grow significantly over time. Solar power is expected to be one of the fastest growing sources of energy over the next 25 years. As the energy, information administration forecast solar electricity generation capacity to increase by more than 10 times from 2015 to 2040. The Recurrent transaction was one of several acquisitions that the Partnership completed in 2016. Year-to-date we’ve acquired 531 assets, representing an increase of 36% over that period for total consideration of approximately $271 million. These acquisitions are expected to contribute annual rents of approximately $16.8 million, increasing total rents to over $45 million. And these acquisitions include both organic and ROFO drop-downs as well as direct third-party acquisitions including the recently announced Recurrent transaction and assets acquired under the Unit Exchange Program. In terms of our sponsor, as a result of continued improvements made in back-office resource allocation and process enhancements, acquisition activity remains extremely strong and at near record levels. Signed acquisition contract volume by the sponsor increased by almost 80% in the first nine months of 2016 versus last year. These acquisitions at the sponsor are expected to drive considerable opportunity for higher acquisition activity at LMRK. The sponsors’ acquisition activity has been very strong within the renewable segment as well as internationally with the primary focus in Australia. International acquisition opportunities both for the sponsor and the Partnership represent an area of growth for LMRK and we expect to see much more activity over the next several quarters, as part of our long-term strategy of acquiring third party and international assets directly at the Partnership level. Landmark Dividend remains focused on acquiring assets with higher cap rates and other characteristics that make for attractive drop-down opportunities for the partnership. As the sponsor continues to acquire assets at near record levels, the ROFO asset portfolio plus additional assets under management remains very healthy and currently has more than 600 tenant sites as of September 30, 2016. Even after the Landmark Fund G ROFO drop-down acquisition of 391 assets at the end of August. These tenant sites under management at the sponsor represent approximately $14 million in annual rents which would represent an increase of approximately 30% over the Partnerships’ current total revenue run rate if the entire portfolio of assets were drop-down. Overall, our strong results this quarter are consistent with our expectations. Our portfolio continues to perform as anticipated producing stable escalating cash flows that help drive our growth. With our capital capacity and flexibility we believe we can take advantage of the strong asset originations at our sponsor as well as direct third-party asset acquisition opportunities both domestically and internationally. With a focus on our core long-term strategy, we’re confident we can take advantage of these significant opportunities available to the Partnership and drive value for our unit-holders. And with that I’ll hand the call over to George for a more detailed financial review of the quarter. George?

[George Doyle:]

Thank you, Tim. As I review the third quarter, keep in mind that during the quarters, the Partnership completed several acquisitions from sponsor and its affiliates. Similar to previous quarters, the assets acquired are recorded at the historical cost of the sponsor, as the transactions are between entities under common control. The financials of the Partnership are adjusted retroactively, as if the transactions occurred on the earliest date during which the assets were under common control. The reconciliation in our press release, separately presents our results of operations from those of the drop-down assets, predecessor prior to our ownership. I will focus my comments on the results in the column labeled, Landmark Infrastructure Partners LP in the reconciliation, which excludes the results of the drop-down assets predecessor, prior to the date of the acquisition. We generated revenue for the third quarter of $8.8 million, which was an increase of 59% year-over-year. The growth is primarily due to the incremental drop-down transactions that we have completed since the third quarter of last year, and to a lesser extent organic growth from the portfolio. The three drop-downs announced in the third quarter contributed approximately $1.1 million in revenue. G&A expenses for the quarter were $632,000, before for reimbursement from our sponsor of $415,000. 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 were higher than Q3 2015, as a result of higher tax preparation and consulting fees. Adjusted EBITDA, which excludes several non-cash items, was $8.3 million for the quarter, an increase of 65% year-over-year. We ended the quarter with 1,900 leased tenant sites out of a total of 1,958 available tenant sites. And the occupancy rate for the quarter was 97%, which is in line with our expectations. We finished the quarter with $179 million of outstanding borrowings under our revolving credit facility. The increase during the quarter was primarily due to the two organic drop-down acquisitions and the cash portion of the ROFO drop-down acquisition, offset partially by the proceed to the Series B preferred offering in August. In October we amended our revolving credit facility increasing its capacity by $32 million to $282 million. As of September 30, our leverage ratio under our revolving credit facility was at approximately 6.5 times adjusted EBITDA. The Partnership wide leverage ratio was approximately 7.5 times adjusted EBITDA and approximately 90% of our total borrowings were fixed or fixed through interest rate swaps as of September 30. In regards to our ATM programs, during the third quarter, we 274,000 common units with net proceeds of approximately $4.7 million and 64,000 Series A preferred units with net proceeds of approximately $1.6 million. October 26, he Partnership announced its third quarter cash distribution of $0.3375 per common unit or $1.35 per common unit on an annualized basis. This distribution is 17.4% higher than the annualized minimum quarterly distribution, and represents a 1.5% increase over the second quarter 2016 distribution of $0.3325 per common unit. This quarter's distribution also mark the seventh consecutive quarter, that the Partnership has increased its quarterly distribution since its initial public offering in November 2014. Our coverage ratio which is defined as distributable cash flow divided by distributions, declared on the weighted average common in subordinated units outstanding during the quarter was 0.82 times in the third quarter. Our coverage ratio for the quarter was temporarily impacted by the securitization transaction in June, and the Series B preferred offering in August. As a result of the securitization, we entered the quarter with over 100% of our debt either fixed or fixed through interest rate swaps, which is well above our target fixed rate debt level of approximately 70%. Additionally, the proceeds from the Series B preferred offering were not fully deployed during the quarter. We ended the quarter at 7.5 times adjusted EBITDA. After the closing of the common offering and the Recurrent acquisition, our leverage level is at approximately 7.2 times adjusted EBITDA which gives us significant dry power heading into the fourth quarter, in the first half of 2017. Today we are announcing our initial guidance for 2017. The sponsor has expressed its intent to offer us the right to purchase $200 million of assets. These acquisitions combined with organic portfolio growth are expected to drive distribution growth of 10% over the fourth quarter 2016 distribution, by the fourth quarter of 2017. We’re also updating our 2016 guidance. The sponsor previously expressed its intent to offer us the right to purchase assets in the range of $200 million to $300 million in 2016. Through October 31, we have completed acquisitions totaling $271 million. We’re updating our guidance to reflect the acquisitions closed to date and our expectations for the remainder of the year. Our sponsor has now expressed its intent to offer us between $300 million and $310 million in drop-down and third party acquisitions in 2016. As a result of the near-term impact from the large common unit capital raise we completed on October 19, we’re updating our distribution growth guidance for 2016 to 7% to 10% over the fourth quarter of 2015 distribution of $0.325 per common unit. Due to the timing of the common unit offering, we do not expect to fully deploy the capital raise on October 19, and complete our financing plans until the first half of 2017. As we head into the remainder of the year, in the first half of 2017, we believe that we’re well positioned for acquisition opportunities. We expect acquisition opportunities for the remainder of 2016 to come from one organic drop-down acquisition and direct third-party acquisitions. As Tim mentioned, the pipeline of assets available to the Partnership at the sponsor level for future drop-downs continues to grow. In summary, the Partnership delivered another quarter of stable cash flow and strong year-over-year growth and we are well positioned for future growth. Acquisition activity remains strong at the sponsor and we have secured the necessary capital to make further accretive acquisitions. Our focus remains the same to create value for all of our unit-holders. We will now take your questions.

[Operator:]

[Operator Instructions]. Our first question comes from the line of Ric Prentiss from Raymond James. Your question please.

[Ric Prentiss:]

Thanks, good morning, good afternoon depending on where you’re at.

[Tim Brazy:]

Good afternoon Ric.

[George Doyle:]

Ric, hi.

[Ric Prentiss:]

Couple of questions, some math questions if I could? So, given the updated guidance for the 4Q 16 over 4Q 15 distribution, so 7% to 10%, so we should say $0.325 and they’re ready to be 7% or 10% higher, so $0.348 or $0.355 of distribution per units, is that the correct math?

[George Doyle:]

Yes, that’s right.

[Ric Prentiss:]

Okay. And what would cause given where we’re at in this time of the year to vary between the high and the low, what’s kind of the variable that would move it between those?

[Tim Brazy:]

I would say it’s really acquisition opportunities what we see in fourth quarter was potentially going to close beginning at the first quarter, that’s really the big driver.

[Ric Prentiss:]

And then, I think you mentioned there was one more drop-down that you’re anticipating in ‘16?

[George Doyle:]

That’s right. Yes, we’re starting to do a few more direct acquisitions compared to what we used to do historically. But we do see one let’s say drop-down that’s probably around the size of some of the other ones we’ve done this year, little bit on the smaller side.

[Ric Prentiss:]

Yes, okay. And then, the 2017 guidance, so then we should assume that if the 4Q 16 is $0.348 to $.0355, the target then would be 10% above either of those numbers depending on which one you pay. So maybe $0.383 to $0.391?

[George Doyle:]

Yes, that’s right.

[Ric Prentiss:]

Okay. Just wanted to make sure I’ve got it right as we calculate it out. Then your coverage ratio obviously is somewhat concerning because you did go down below 1, typically I think you like to have it more 1 or maybe 1.05. You mentioned the timing impact, we get it, financial flexibility you’ve done the offering. What sort of timeline should we look at for you getting back to coverage north of 1 is still your target to be in that kind of 1.05 range?

[George Doyle:]

Yes, it’s still our target to be in the 1.05 range. It will probably take us into either the latter part of the first quarter or beginning part of the second quarter to reach that point. We’re hopeful in the second quarter of next year the full-quarter results would show us covering. Distribution, but I would expect, by the time we get there, we would have had a couple of distribution increases as well. But this quarter was just a very busy quarter within the span of 90 days, we did the preferred offering, we did the common offering, we just had an awful lot going on. And our coverage ratio for the quarter just doesn’t necessarily reflect where the portfolio and the Partnership, is as of this point in time. So we’ll work through the excess capital, like I said, probably end of Q1, beginning of Q2 timeframe.

[Ric Prentiss:]

And other kind of all interrelated questions here, on the 2017 target of 10%, that’s implicit then in that $200 million of acquisitions. It also mentions organic portfolio growth. Is that implying organic rent growth or is that further like third party acquisitions?

[Tim Brazy:]

That’s the organic rent growth. So we think that will drive a portion of that 10% growth.

[Ric Prentiss:]

Got you. So it’s not portfolio growth meaning that the portfolio is going to have more assets in it but its growth of the rent on the existing portfolio?

[Tim Brazy:]

Exactly, yes.

[Ric Prentiss:]

Okay. Those are the ones I got. Thanks so much.

[Operator:]

Thank you. Our next question comes from the line of Richard Schiller from Baird. Your question please.

[Richard Schiller:]

Hi, good morning guys. I have a couple of ones, here. Related to the reduction in DPU growth estimates this year and what led you to be on the low-end of the range for next year?

[Tim Brazy:]

Sure. So, for this year, it was really a reflection of the large capital raise we did. The timing of the capital raise didn’t match perfectly with the deployment of assets, rather than raise the distribution somewhere in that 10% to 15% range, we thought it was a little bit more prudent to finish deploying all that capital before we increase the distribution within that range. The acquisition opportunities in front of us, as far as what we can see at this point for 2017 and really what’s driving the 2017 guidance, as we get further into the end of the year and into beginning of 2017 we’ll have more clarity as to what the acquisition opportunities are and we’ll provide updates to that guidance as we move forward.

[Richard Schiller:]

Okay, great, thanks. And similar question; was that the timing or what was the mantra [ph] not lowering the guidance when you guys did the offering a couple of weeks back?

[Tim Brazy:]

It was the size of the offering the ultimately went with that decided the change in guidance.

[Richard Schiller:]

Okay. For your 2016 acquisition expectations, does that include only drop-downs or also the third party or purchasing?

[Tim Brazy:]

I’m sorry can you repeat that, I didn’t hear that clearly?

[Richard Schiller:]

Yes, sure, for the 2016 acquisition expectations, does that include only drop-downs or also the third party product you’re purchasing?

[Tim Brazy:]

It would include both. We expect there would be some direct third party acquisitions, I would say on the smaller side, these won’t be big third party acquisitions but there will be some. And then as I mentioned one drop-down from the sponsor is expected.

[Richard Schiller:]

Okay, great. Why is the sponsor offering less, product next year into the MLP?

[Tim Brazy:]

I would say it’s a combination of couple of factors, this year you had one fund at the sponsor that was reaching its end of life. And so that was relatively large fund which created sizable acquisition opportunity for the partnership. As we look into 2017, there aren’t as many ROFO assets in funds that are reaching their liquidation period. So it’s really a matter of what ROFO assets are available for drop-down. And as I mentioned we’ll have a little bit more visibility as to what some of the acquisition opportunities will be as we start to get into the beginning of 2017.

[Richard Schiller:]

Okay, awesome. That’s it from me. Thanks guys.

[Tim Brazy:]

You’re welcome.

[Operator:]

Thank you. Our next question comes from the line of Mike Gyure from Janney. Your question please.

[Mike Gyure:]

Yes, good morning guys. Could you talk a little bit about I guess your expectation maybe for 2017 of overseas expansion or kind of growing the portfolio outside of U.S. what are you looking at there, maybe compared to where you are today?

[George Doyle:]

Sure. So, our international, the international side of our portfolio, they’re still relatively small. We have a number of assets outside of U.S. predominantly in Australia. As we look out over 2017, we do continue to see Australia acquisition opportunities potentially some Canadian opportunities. We are still evaluating Western Europe. I mean, I would say that was our principally for the wireless and outdoor segments. And then beyond that, I think, it will - that would probably be the extent of what we see in 2017 for international acquisitions. I think there is, other markets potentially down the road further that are attractive markets to enter but I don’t think for 2017.

[Mike Gyure:]

Okay. And then, specifically on the third quarter, you guys took an impairment charge. Can you talk a little bit about that and maybe your expectation for the rest of the year?

[George Doyle:]

Sure. Yes, we did get a couple of termination notices on-sites, as I’ve mentioned on prior calls, they periodically come in so we had a little bit of churn during the quarter. There were, couple of very small billboards that we’re taking out. These are sites that frequently have annual rents in the $5,000 to maybe $7,000 range, so pretty small assets. On the wireless side, there were a couple of towers that were taken down, the tenant had lost their wireless carriers on tower and ultimately determined to take down the towers. That’s a relatively infrequent thing that happens on the tower side, sometimes it’s regulatory driven some jurisdictions don’t allow and make towers to stay up, so that the tower companies are forced to take a tower down. And that happened for one of these situations. So, we will periodically see impairments but I don’t imagine that they’re going to amount to too much beyond what you’ve seen this quarter and what you’re seeing historically.

[Mike Gyure:]

Great. Thank you.

[Operator:]

Thank you. [Operator Instructions]. Our next question comes from the line of Liam Burke from Wunderlich. Your question please.

[Liam Burke:]

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

[Tim Brazy:]

Good morning.

[Liam Burke:]

Tim, on the solar, it’s smaller part of your business, you mentioned the highlights of the predictability of the alternative energy, but is there any offset in terms of growth rates, growth of the asset?

[Tim Brazy:]

In terms of the rental stream?

[Liam Burke:]

Yes.

[Tim Brazy:]

Or just the market in general?

[Liam Burke:]

No, just in the rental stream.

[Tim Brazy:]

Generally speaking relative to the other industry segments where we focus, the growth rates a bit lower. These are long-term power purchase agreements with those, credit rated off-takers. So they would procure generally speaking as a slightly lower growth rate. And that really speaks to the long-term degradation of the electricity generating capacity of the panels. So, at a certain point in time you really don’t want the rental income or the rental payment to grow beyond what’s reasonable given the power generating capacity of the actual project itself. And so, these are longer term projects, you’ll see reporting of the projects at a certain point in time, most likely with more cost efficient, more technologically efficient panels out in the 15 or 20 or even longer timeframe.

[Liam Burke:]

Okay. And on the third-party acquisitions, the pipeline is building. So I’m presuming you don’t see a significant amount of competition for the quality assets?

[Tim Brazy:]

Competition has been stable. Really no significant changes since our last call, we’re really here. And the market continues to be I would say as robust as it always has. In fact we’ve seen some competition reduce their activity in various segments and more opportunities to engage with property owners. So we expect to see real activity going forward.

[Liam Burke:]

Great. Thank you, Tim.

[Operator:]

Thank you. And this does conclude the question-and-answer session of today’s program. I’d like to hand the program back to Tim Brazy, CEO.

[Tim Brazy:]

Great. Thanks very much. We appreciate you joining us today. And look forward to speaking with you again next quarter.

[Operator:]

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good-day.