Landmark Infrastructure: Don't Be Blinded By The Yield

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About: Landmark Infrastructure Partners LP (LMRK), Includes: EPR, NNN, O, SRC, STOR, VER, WPC
by: Brad Kenagy
Summary

Shares of Landmark Infrastructure Partners have seen a significant rally over the past two weeks.

Dividend coverage appears to be a potential issue.

If the dividend is cut, I estimated shares will fall to around $10/share.

In this article, I will be detailing why I believe shares of Landmark Infrastructure Partners LP (LMRK) are overvalued and why I believe investors should be very cautious with this high yield stock. The main reason why I believe investors should be cautious is because of the dividend coverage.

Dividend Coverage

When looking at the dividend coverage for Landmark Infrastructure Partners, I compared their coverage to potential REIT peers in the net lease category. One of my go-to sources for REIT information is Hoya Capital Real Estate. I went to an article covering net lease REITs to get a list of companies to compare to Landmark Infrastructure Partners. As you can see in the following table, Landmark Infrastructure Partners has the worst dividend coverage of this group of net lease REITs.

CFFO (ttm)

CF for Divs

Divs/CFFO

Landmark Infrastructure Partners

LMRK

$38.05

$45.66

120.00%

Spirit Realty Capital, Inc.

(SRC)

$320.80

$329.00

102.56%

EPR Properties

(EPR)

$477.20

$477.20

100.00%

VEREIT, Inc.

(VER)

$632.00

$607.00

96.04%

W. P. Carey Inc.

(WPC)

$499.90

$438.30

87.68%

Realty Income Corporation

(O)

$924.00

$744.00

80.52%

National Retail Properties, Inc.

(NNN)

$456.90

$330.20

72.27%

STORE Capital Corporation

(STOR)

$363.10

$244.60

67.36%

Table data from Gurufocus

Valuation

I also compared Landmark Infrastructure Partners to the other net lease REITs in terms of valuation to see if the current valuation made sense. The following table shows Landmark Infrastructure Partners is trading at a discount to the average and median Price/CFFO. The question an investor must ask is if shares of Landmark Infrastructure Partners should trade near the potential peer average or is the low valuation justified? If Landmark Infrastructure Partners were to trade at the average, yes shares would be undervalued at current levels. However, based on the dividend coverage and potential for a dividend cut, I believe the discount is justified and I believe shares should not trade at the potential peer average.

CFFO

Shares

CFFO/Share

Price

P/CFFO

Landmark Infrastructure Partners

LMRK

$38.05

27.7

1.374

$14.78

10.76

CFFO (ttm)

Shares

CFFO/Share

Price

Price/CFFO

Realty Income Corporation

O

$924

291.2

3.17

$62.94

19.84

National Retail Properties, Inc.

NNN

$456.9

157.3

2.90

$48.02

16.53

STORE Capital Corporation

STOR

$363.1

207.9

1.75

$28.70

16.43

W. P. Carey Inc.

WPC

$499.9

108.3

4.62

$68.29

14.79

VEREIT, Inc.

VER

$632

967.8

0.65

$7.50

11.48

EPR Properties

EPR

$477.2

74.4

6.41

$67.50

10.52

Spirit Realty Capital, Inc.

SRC

$320.8

85.6

3.75

$36.49

9.74

Average

14.19

Median

14.79

Table data from Gurufocus

Dividend Cut?

If the dividend is cut, I will attempt to estimate the level it will be cut to and estimate how far the stock could fall. The following table shows that based on an average of the coverage ratio for the potential peer group, I estimate the dividend could be cut to around $0.203/quarter and if that were to occur, I estimate shares could fall to around $10/share. I will go line by line through my table to show how I arrived at that estimate. The first line is simply the average divs/CFFO from my table in the dividend coverage section above. The second line is that number multiplied by the cash flows from operations of the last year, which got me an estimate of how much dividend payments “should be” to be in line with potential peers. I then subtracted preferred dividend payments from that amount and the result was a total of $22.44 million. I then divided that amount by 27.7 million shares to arrive at an annual dividend of $0.81. If something like that does occur, it is worth it to try to figure out to where shares could fall to. I looked on Zacks and found that over the last five years (or since the IPO) the average dividend yield for Landmark Infrastructure Partners has been 8.08%. If the stock were to trade at that yield after a dividend cut to the level I estimated, shares would trade at around $10/share.

Peer group Average Divs/CFFO Ex

86.63%

LMRK CFFO x Peer group Average Divs/CFFO Ex

$32.96

Preferred Dividends

$10.52

Estimated Remaining Common Dividend

$22.44

Shares

27.7

Estimated Dividend (annual)

$0.810

Estimated Dividend (quarterly)

$0.203

5 yr avg Dividend Yield (ZACKS)

8.08%

Target Common Stock Price

$10.03

Dividend frequency

Another sign of a potential dividend cut, flat dividend or slower growing dividend is the frequency of dividend increases slowed in 2018. The following table shows the dividend was increasing every quarter and then 2018 rolled around and the dividend has remained the same all year. I looked back through dividend news on Seeking Alpha and noticed Landmark Infrastructure Partners usually makes their dividend announcement for Q1 during the last part of January, so it will not be long until we will see what they decide.

Seeking Alpha

Tenant Issues

The following chart shows a breakdown of revenue by segment and tenant. The wireless + cell tower segments account for 60% of revenues, billboard/advertising companies account for 28% and utilities/renewables account for 12% of revenues. There are a number of companies on the list with potential issues.

Landmark Infrastructure Partners investor presentation

The first issue I see is that Clear Channel Outdoor (CCO) is the largest tenant by revenues and they have plenty of issues they are going through right now with the iHeartRadio bankruptcy. Clear Channel Outdoors has over $2 billion in debt due in 2020 and their credit rating was downgraded by S&P in June.

The second issue I see, and what has sent cell tower stocks lower is the potential of a T-Mobile (TMUS) and Sprint (S) merger. Every once in awhile news comes out about the potential merger and it sends cell tower stocks lower, because there is the potential to have one less tenant needing space on a tower.

The third issue I see is Landmark Infrastructure Partners has exposure to California utilities, one of which is PG&E (PCG). There has been bankruptcy rumors going around and recently they had their credit rating cut by S&P. PG&E is a small part of revenues, however, Southern California Edison, which is part of Edison International (EIX) also has potential issues from the fires.

Technical Outlook

The short-term technical outlook for Landmark Infrastructure Partners is at a critical point because shares are near a level of resistance. The red line at $14.80 is the low shares closed at after a massive down day in April 2018. Shares retested this level and were briefly above the level in October but fell. Shares are back to the level and are on the verge of breaking through. The move in the stock had been straight up and the RSI is very near an overbought reading. Therefore, with the combination of the stock being near overbought levels and near a resistance level, I believe a correction is imminent.

ThinkorSwim

Closing thoughts

In closing, I believe there is the potential for a dividend cut sometime in 2019 because of the dividend coverage. Because of that factor, as well as others, I do not believe shares should trade at a valuation near the average of potential peers and I believe the discount is justified. Should they cut the dividend, my estimate points to the stock falling to around $10/share.

Disclaimer

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.