Landmark Infrastructure Partners' (LMRK) CEO Tim Brazy on Q4 2016 Results - Earnings Call Transcript

| About: Landmark Infrastructure (LMRK)
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Landmark Infrastructure Partners LP (NASDAQ:LMRK) Q4 2016 Earnings Conference Call February 23, 2017 12:00 PM ET

Executives

Tim Brazy – Chief Executive Officer

George Doyle – Chief Financial Officer

Marcelo Choi – Vice President, Investor Relations

Analysts

Ric Prentiss – Raymond James

Mike Gyure – Janney

Jonathan Atkin – RBC Capital Markets

Operator

Good day, ladies and gentlemen, and welcome to the Landmark Infrastructure Partners Fourth Quarter 2016 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, this conference call is being recorded.

I would now like to introduce your host for today's program Marcelo Choi, Vice President, Investor Relations. Sir, you may begin.

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'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

Thanks Marcelo and good morning everyone. We appreciate you all joining us today as we present and discuss our results for the fourth quarter results and update you on the operating activities at the Partnership and our sponsor Landmark Dividend. But before I get into the details of this past quarter, I would like to take a moment to talk about this past year.

As you know 2016 was our second full year as a public partnership and this last year we have reached a significant number of milestones. Since the initial public offerings, we have nearly tripled the number of assets in our portfolio. From the 701 tenant sites, we had at the IPO to over 2000 tenant sites at the end of last year. We have also more than tripled our revenue from approximately $13 million at the time of the IPO to over $47 million today and despite some of the major challenges, the general and the office sector has spaced the last two years.

We have increased our cash distributions for eight consecutive quarters representing growth of over 10% per year. In 2016, we continued to execute our business strategy and completed five drop down acquisitions including one ROFO drop down transaction along with several direct third party acquisitions. In particular we completed the recurrent energy solar land transaction, which was one of the largest solar land acquisitions in 2016.

In total we acquired 590 assets last year for consideration of approximately $292 million. These assets have performed extremely well during the year with our overall occupancy rate remaining consistently high at 97% and the portfolio has continued to grow through contractual lease escalators and modifications.

Turning to the fourth quarter we are very pleased with our operating and financial results. We posted another quarter of strong year-over-year growth driven primarily by the multiple acquisitions we completed in the last 12 months and the organic growth of the assets in the portfolio. During the fourth quarter we completed one portfolio drop down acquisition in December and purchased several individual assets through direct third party transactions again highlighted by the recurrent energy solar acquisitions.

On a combined basis these acquisitions accounted for 66 assets for total consideration of $93 million. In total we bought 43 wireless communication assets, 13 outdoor advertising assets and 10 renewable power generation assets. And as in all of our prior acquisitions, these are also immediately to distributable cash flow. The assets added to the already attractive characteristics of our existing portfolio featuring 100% occupancies.

An average contractual lease escalator of about 2.5% and Tier I tendency of about 82%. Additionally, the aggregate remaining real property interest is 70 years, the lease term was 23 years and the asset had a very broad geographic mix. For the full calendar year 2016, the 593 assets we bought represented an increase of 41% year-over-year. These acquisitions are expected to contribute annual rents of $18.2 million increasing total rents to $47 million per year.

The assets we acquired included both organic and ROFO dropdowns as well as direct third party acquisitions. In terms of macro trends, we believe the opportunity of the partnership is great today as it's ever been. All 3 of our primary target markets, communications, infrastructure, outdoor advertising and renewable power generation, all continue to grow and benefit from a world increasingly driven by the need and demand for their products and services.

These markets are incredibly large, highly fragmented and growing significantly creating continued opportunity for us to acquire assets and drive growth at partnerships. One macro worth noting of course is the recent presidential elections. In the past several weeks there has been some conversation about how the change in the administration could potentially impact the wireless sector in our business. More specifically the potential for a T-Mobile and Sprint combination and how that would impact LMRK's top and bottom line.

This is clearly a situation flux but we believe that the potential for a T-Mobile & Sprint combination faces real challenges including strict regulatory hurdles. However assuming the merger is eventually approved and completed, we believe the financial impact to our business would be minimal for a variety of reasons. We believe the completion of the merger and the integration of the two companies including the rationalization of the two separate networks could potentially take years.

Second, there is not complete overlap between the two networks in every region suggesting that any potential decommissioning would be managed to make the entire network more efficient and the resulting network would continue to use many of the acquired sites. At the partnership level T-Mobile and Sprint accounted for only 13% and 10% LMRK's fourth quarter 2016 revenue respectively.

However, the direct overlap of the sites is only about 5% of the total revenue in the portfolio so while the potential impact from the overlap from the T-Mobile and Sprint assets in our portfolio could be as high as perhaps a mid-single digit percentage of LMRK's total revenue based on that simplistic analysis, we believe that there would be some significant offsetting revenue opportunities resulting from sites being upgrade to a common platform.

In terms of our sponsor Landmark dividend, it continues to make significant improvement in its back office resource allocations and process enhancements all of which have contributed to higher acquisition activity. Last year for example signed acquisition contract volume at the sponsor increased by 67% versus 2015. As in the past higher volume activity at the sponsor's expected to drive meaningful growth opportunities for LMRK. The acquisition markets for our three segments remains very attractive.

In the wireless communication for example, new rooftop and tower tenant sites continue to grow as the wireless carriers and the tower companies continue to deploy significant capital to provide the necessary network enhancements to satisfy ever increasing demand. We are also seeing opportunities in growth within the outdoor advertising segment both domestically and internationally. As digital conversion for existing and new sites drives better economics for the tenants.

And finally the renewable power generation segment s driving growth as solar activity is an especially strong. In addition to our domestic acquisitions, we are also focused on our international efforts and we expect increased acquisition activity from both direct third parties and drop down transactions. In December we formed a joint venture with a partner who will selectively source and manage outdoor advertising assets for us in certain European markets.

We believe this venture is a tremendous opportunity for LMRK because it allows us to acquire high quality outdoor advertising assets in new strategic markets that have potential upsides through digital conversions. As a result of this venture we do expect acquisition volume to increase materially later in 2017 and beyond. As our sponsor continues to acquire significant number of assets, the ROFO asset portfolio plus additional assets under management remains very healthy and currently has about 700 tenant sites as of December 31, 2016. These tenant sites under management at the sponsor represent approximately $16 million in annual rents which would represent an increase of about 34% over the partnerships current total revenue run-rate if the entire portfolio of assets were dropped down today.

Overall the partnership delivered another quarter and another year of solid operating and financial results, generating stable cash flow and strong year-over-year growth. As we look out to the remainder of this year we see a clear pipeline of assets available for purchase and feel confident that we have financial capabilities and flexibilities to deliver on our guidance of acquisitions and growths. Going forward of course we will continue to build on our leadership position as the premier ground lease Acquisition Company in the industry.

Our core businesses are performing well, we are excited about where the new international opportunities will take us but ultimately our commitment remains the same, to deliver long term profitable growth and create value for all of our unit holders and with that I will hand the call over to George for more detailed financial review of the quarter. George?

George Doyle

Thank you Tim. As I review the fourth quarter, keep in mind that during the quarter, the partnership completed an acquisition from the sponsored affiliates. Similar to previous quarters, the assets acquired are recorded at the historical costs to the sponsor as the transactions are between entities under common control. The financials of the partnerships are adjusted retroactively as if the transactions occurred on the earliest day during which the assets were under common control.

The reconciliation in our common 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 of the common label Landmark Infrastructure Partners LLP in the reconciliation which excludes the results of the drop down assets predecessor prior to the date of acquisition.

We generated revenue for the fourth quarter of $11.7 million which was an increase of 72% year-over-year growth. The year-over-year growth is primarily due to the drop down transactions and third party acquisition that we have completed since the fourth quarter of last year. In organic growth from the portfolio including additional revenue from contractual rent escalators.

G&A expenses for the quarter were $0.9 million before the reimbursement from our sponsor of $544,000. The G&A reimbursement from our sponsors reflected as a capital contribution rather than as a direct reduction to our G&A expense. Our G&A expenses were higher than Q4 2015. As a result of higher professional fees. Adjusted EBITDA which excludes several non-cash items including unrealized gain on derivatives and acquisition related expenses increased to $10.8 million for the fourth quarter, an increase of 68% year-over-year.

We ended the quarter with 1,956 leased tenant sites out of a total of 2,022 tenant available sites. The occupancy rate for the quarter was consistent with the prior quarter at 97%. We finished the quarter with $224.5 million of outstanding borrowings under our revolving credit facility. The sequential increase was primarily due to the recurrent transaction. One organic drop down acquisition in December and several smaller direct acquisitions offset partially by the proceeds of our common unit offering in October.

As of December 31 our leverage ratio under our revolving credit facility was approximately 6.5 times adjusted EBITDA. The partnership wide leverage ratio was approximately 7.4 times adjusted EBITDA and approximately 76% of our total borrowings were fixed through interest rates swaps through December 31. In regards to our ATM”s programs we did not have any activity during the fourth quarter.

For the full year 2016 we issued 4,500 common units with gross proceeds of approximately $6.9 million and 64,000 Series A preferred units with gross proceeds of approximately$1.6 million. In January 25, the partnership announced its fourth quarter distribution of $0.35 per common unit for $1.40 per common unit on an annualized basis. This distribution is 7.7% higher than the fourth quarter 2015 distribution of 32.5 cents of common units represents a 3.7% increase over the third quarter 2016 distribution of 33.75 cents per common unit.

This quarter's distribution also marked the eight consecutive quarter, this 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 0.81 times in the fourth quarter. Our coverage ratio for the quarter was temporarily impacted by the common unit offering in October.

As we continue to acquire the assets outlined in our guidance, our coverage ratio will improve significantly. As we mentioned last quarter while we are still targeting a 1.0 times coverage ratio, our coverage ratio is significantly impacted by the timing of capital raises and acquisitions. The common offering in October positioned us well as we enter into 2017 but it will take a couple of quarters to fully deploy the capital.

Restoring coverage on the distribution will depend on the timing of acquisitions and financings in 2017. At 6.5% times the leverage under our revolving credit facility, we have significant capacity for additional acquisitions. Today, we are reiterating our guidance for 2017. The sponsor has expressed its intent to offer us the right to purchase $200 million of assets which include direct third party acquisition opportunities. These acquisitions combined with organic portfolio growth are expected to drive distribution growth of 10% over the fourth quarter, 2016 distribution of $0.35 per common unit by the fourth quarter 2017.

Our guidance does not contemplate a common unit offering in 2017, as the common unit offering in October and other sources of financing planned for 2017 have given us sufficient capital to finance the acquisitions in our guidance. This morning we filed an amendment to our shell to increase its capacity but as I just indicated we have no planned common offering in 2017 based on the $200 million in acquisitions.

In summary we are very pleased with the fourth quarter operating and financial results. As our assets continue to perform producing consistent predictable and growing cash flows. We are also very pleased with our overall performance in 2016 as we were able to deliver another year of solid growth. As we look out to 2017, we are encouraged by the growth opportunities ahead of us both domestically and internationally and we believe that we have sufficient capital to deploy in the near term to make accretive acquisitions.

We will now take your questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] our first question comes from Ric Prentiss from Raymond James. You may begin.

Ric Prentiss

Thanks. Hi guys. Couple of questions. First, appreciate all those details and reaffirm the guidance, when we think about the cap rates, how do you think about the $200 million worth of assets, acquisitions and the cap rates might be given that you are seeing some different segments or different geographical areas?

Tim Brazy

Sure, yes we think the blended cap rate for 2017 is going to range in the 7% area. It really is going to depend on where some of the acquisitions are sourced because where some of the international acquisition opportunities have a bit higher cap rate, but they are typically a little bit tax dragged associate with that but on average it's going to be in the 7% range.

Ric Prentiss

Okay. And then still targeting the 1.05 coverage rate. Obviously that tied to offerings you raised last year. But the pace this year -- how should we think about that, we're now almost through February? No drop downs yet. I guess question with that is how come no dropdowns announced so far, there is a factor of [indiscernible] playing it? How come no dropdown George?

George Doyle

Sure. So we did a small dropdown at the end of December. The next dropdown most likely is going to be let's say 90 days out from back dropdown or a little bit longer. So typically, we don't do too many consecutively or right after another when there are organic dropdowns. As far as the pace over the course of the year, there is probably going to be a little bit heavier acquisition volume. I would think in the second half of the year as some of the different opportunities that we are focused on start to come home. So a little bit of dropdown activity around the end of Q1, I would expect. And then obviously some in Q2 as well, and then hopefully some larger opportunities come in Q3 and Q4.

Ric Prentiss

Okay. And then, I think we had been originally thinking you might do about 306 million worth of dropdowns in 2016, but it came in at 292. Are there some that are being delayed in closing, I think there was some timing issues. But also is there some that might not close and that of maybe our original thoughts of what 16 might be.

George Doyle

Sure. We actually had a handful of assets. They were particularly larger assets that were under contract, so the acquisitions where the seller is bound to close, but due to couple of issues on the development, the timing got pushed back. I would say on average, probably about three months. So we're originally expecting to have these acquisitions closed in the beginning of the December timeframe and now it looks like they're going to start closing in March. So those acquisitions actually would've put us above the guidance that we had previously provided and are also relatively high cap-rate acquisitions so that would've brought up the average cap-rate for 2016. But those acquisitions are still going to close, but just timing got shifted by about 90 days.

Ric Prentiss

So we might be hearing some of those fall into that kind of maybe still get them in 1Q or 2Q.

George Doyle

Yes. I'm expecting that somewhere in 1Q.

Ric Prentiss

And when you mentioned no equity, or no common unit offering contemplated. Now does that include all forms of common equity like the ATM or is it just really no public offering?

George Doyle

Yes, no public offering. So we may open the common ATM, I would expect that we're going to have some UEP transactions over the course of the year as well. There is also the possibility to do -- sponsor to take some units back. So in a number of different forms we expect to issue some units next year, but we don't anticipate another large common offering like we did in October.

Ric Prentiss

Exactly. But you are still going to keep the kind of leverage. What is the target leverage rates that you want to kind of see it flexing around?

George Doyle

We want to operate in the 6 to 8 times leverage range. So right now, we're about 7.5 overall bout 6.5 on the SunTrust revolver. So we have fair amount of room right now. And what we'll do over the course of 2017 is we'll probably term out some balances on the revolver to give us some more acquisition capacity.

Ric Prentiss

Thanks guys. Thanks for those details.

George Doyle

Sure.

Operator

[Operator Instructions] Our next question comes from Mike Gyure with Janney. You may begin.

Mike Gyure

Yes guys, can you talk maybe a little bit on the portfolio mix, I think were up 68%, maybe 70% on the wireless side or you envision that going let's say maybe over the next year, year and a half?

George Doyle

Sure I think the wireless segment is still going to be in that range in the current ranges, it's going to be we think 65% to 70% of our overall portfolio. Yet, it did shift a bit in Q4 with the recurrent transaction. But as we've mentioned previously, if one segment is out of balance with what we're targeting then we may consider adjusting our acquisition strategy a little bit. But I think the general range for wireless will be in that on 60%-70% range.

Mike Gyure

Okay. And then maybe a follow-up on – Can you talk a little bit, I guess on the European joint venture? Kind of and how you envision that and maybe the size you're thinking that ultimately could do sure that's?

George Doyle

Sure. That's a great opportunity for us what that what we've done is we've put together a venture where our venture partner who is very familiar and very experienced with the overall European market. There the party that's going to actually do the acquisition sourcing so line up the transactions then they are going to manage the portfolio. It's a great opportunity because of lot of Europe is in the process of static to digital conversion on the board. So there's potentially a lot of organic growth that can come out of those acquisitions, we're predominantly going to be focused on you your larger, more stable Western European countries. The opportunity is pretty significant. There isn't that much competition over in that market so as far as acquisition volume, we were thinking for 2017 that international acquisitions maybe around 20% of our total acquisition volume. But certainly the opportunity is much larger and certainly scale up from there over time.

Mike Gyure

Okay. That joint venture is just on the outdoor advertising, if you decide to do kind of wireless acquisition that will be outside the joint venture or how does that work?

George Doyle

It would be so that's solely outdoor advertising. We've we considered some other asset classes in Europe, but it's very early stage. We're nowhere near actually making any investments in Europe, outside of the outdoor advertising at this point.

Mike Gyure

Great. Thanks.

Operator

Thank you. Our next question comes from Jonathan Atkin with RBC Capital Markets. You may begin.

Jonathan Atkin

Thanks. I wanted to ask a little bit about the [indiscernible] where you sort of participate in outside. So I think that would be rooftops and outdoor advertising. And I guess to some extent the below market leases. And what do you view is the more meaningful buckets to consider as you look forward over the coming year?

George Doyle

I think the largest opportunity is in wireless at the moment. Especially as you start to look out into 2018 and beyond, our organic growth rates have been pretty consistent with the built-in escalators that you see in wireless which range around 3% on average. And then typically we're able to get a little bit more amendment revenue on top of that. But as we see more buildout for 5G, so some of the densification and some of the equipment upgrade activity that will hopefully drive a little bit stronger organic growth.

On the outdoor advertising side, we do you receive some increasing rents from percentage rents, which is nice but it's not a very fast growing segment for the most part. I mean outdoor advertising has generally been growing along the same pace as the US economy. So you have about 2% average growth in the market. There are some unique opportunities potentially in the portfolio over time where we could get a static converted to a digital. Where potentially we can get much higher growth rate. But yes the outdoor is a little bit lower and then renewables which is our most stable asset class has small growth rate. But it's extremely high credit quality cash flow.

Jonathan Atkin

Thank you.

Operator

Thank you. Our next question is a follow-up from Ric Prentiss of Raymond James. You may begin.

Ric Prentiss

Yes, hi. Just one extra set of questions. Timmy mentioned the new administration Sprint, T-Mobile appreciate the color on what the overlap is. But what about any changes on tax reform, tax relief and what it might mean to you guys and now that you're looking at international any impact?

Tim Brazy

Well, on the international side we take all of the tax and legal frameworks into account. We look at those market opportunity and the pricing in US. I think tax reform is still a situation that's yet to be determined. We don't expect there to be significant impact on our core business. We watch and see what the administration -- the direction the administration has.

Ric Prentiss

I know there have been some thoughts around the MLP versus the REIT structure. Any updated thoughts there?

George Doyle

No, I think they are still pretty consistent with what we've described before. The REIT structure certainly would be a little bit easier for investors from a tax standpoint. It would eliminate UBTI. But our challenge is to really make the most out of the reconversion, we would want to do an internally managed read REIT. Until we get a bit bigger, a little bit more scale this business just can't support the internalization quite yet. I think you would have to have north of a couple billion in assets in order to do that. We think it's an attractive opportunity down the road, because it would potentially lower our cost to capital and make our acquisitions a bit more accretive. But we are consistently looking at that and are evaluating if there are any options to try and simplify things or identify a path that would help us lower our cost to capital.

Ric Prentiss

Then with the ROFO is having about $16 million of annualized revenue still at them again. Is that something maybe is more like a six cap rate versus the seven? Just wondering kind of what partner expectations are that or the parents' expectation was in the ROFO still?

George Doyle

Sure. So those assets are what I would say are the traditional wireless and outdoor advertising asset. So they look very similar to our portfolio over the last couple of year. So they are very high quality. They performed very well, but their value, yes I would say is close to six cap and I would a seven cap. So hopefully there's an opportunity for the MLP to acquire those. But yes, it would be a little bit lower cap rate than what you're going to see for the organic dropdowns that the sponsor is going to provide. The sponsor has flexibility in the organic dropdowns and can target potentially little bit different asset mix to make sure to be able to make those dropdown a bit accretive.

Ric Prentiss

Okay. Thanks for my answers. Thanks guys.

George Doyle

Sure.

Operator

Thank you. I'm showing no further questions at this time. I would like to turn the call back over to Time Brazy for closing remarks.

Tim Brazy

Well, if there aren't any more questions I'd like to thank you all for joining us today. We appreciate the time this morning and look forward to speaking with you again next quarter.

Operator

Ladies and gentlemen this concludes today's conference. Thanks for your participation. Have a wonderful day.

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