For A Triple-Net Lessor, Landmark Isn't The Worst Inflation Hedge
Summary
- The Fed announcement yesterday has made something very clear: easing is our mandate.
- Inflation might be under control in consumer prices, where it's already impacted asset prices with retail money pouring in, but if it's not it could kill a portfolio.
- Lessors aren't necessarily bad, but many would be if they have long duration leases with small built-in escalators.
- Landmark has some CPI-indexed leases, but they benefit mainly from quite short leases on outdoor assets as well as revenue sharing schemes.
- Overall, not bad for the yield prospects despite being a lessor.
Inflation is the flavour of the day for portfolio managers, where some of the sharper sell-offs occurred with the weaker inflation hedges in the market. The Fed has made clear their intention to continue easing, and thus their mandate is squarely economic growth, rather than inflation. We believe in the threat that inflation poses, despite not having seen it in decades, and are managing our portfolio accordingly towards commodities and other exposures that are more favourable in this sort of environment. One of the stocks that was often on our watch-list, Landmark Infrastructure Partners (NASDAQ:LMRK), has become an idea we expect to be disrupted since it relies on leases, with fixed payments or relatively modest and unchangeable escalators. However, relative to what we expected from a lessor, Landmark is actually a reasonable inflation hedge, although not great. It manages thanks to its outdoor assets in particular, as well as some explicit inflation hedging. With contract durations being relatively skewed to the short side, the picture does not warrant an excessively bearish view.
Landmark Portfolio
Its ability to withstand an inflationary environment ultimately comes down to its portfolio composition. The first and most obvious contributor to inflation resilience is the average duration of the leases for its assets.
(Source: SEC.gov, FY 2020 10-K LMRK)
Looking at the durations excluding the possibility of renewal gives us an idea for how long LMRK is going to be stuck on modest escalators, averaging at around 2.5%, not suited for a potentially inflationary environment. A good 20% of leases are ready to be renewed and can be at more fair market rates that will incorporate inflation risk if inflation continues to become a more prominent problem. 50% of income is very locked up for the foreseeable future. However, the average lease duration is 5 years excluding renewal periods, so much of that locked up income is likely skewed towards the 5 year level rather than much longer durations.
Another thing to consider is LMRK's outdoor exposure, which drives much of these shorter lease durations. In addition to that, the outdoor exposure provides some inflation protection through revenue sharing agreements with tenants, which gives them access to more responsive revenues through their tenants advertised end-markets. Finally, 3% of their revenue is associated with CPI-indexed lease agreements, which although limited is added respite from inflationary pressures.
Conclusion: Now is Not the Time
Despite the fact that there are inflation hedges within the Landmark portfolio, now would not be a good time to add, in our opinion, despite some selling pressures on the units. While holding could be a good idea for unitholders benefiting from the ample yield, we still think that lessors with typically long duration contracts can be subject to more sweep-selling. Moreover, Landmark is not without its issues beyond inflation. Their outdoor assets, which comprise a smaller part of their portfolio after asset sales, are at more long-term disruption from trends like autonomous driving, and are also under pressure from the COVID-19 situation which has hit advertisers hard. Indeed, outdoor tenants can cancel their leases with notice, and if put under more pressure due to economic troubles, they might. However, the inflationary environment, associated with substantial easing, mitigates that risk. Overall, Landmark's return profile will not be overly threatened, and for a triple-net lessor, it's a pretty fine exposure with a good yield. However, we will not be buying until the outlook clears up.
This article was written by
The Valkyrie Trading Society is a team of analysts sharing high conviction and obscure developed market ideas that are likely to generate non-correlated and outsized returns in the context of the current economic environment and forces. They are long-only investors.
They lead the investing group The Value Lab where they offer members a portfolio with real time updates, chat to answer questions 24/7, regular global market news reports, feedback on member stock ideas, new trades monthly, quarterly earnings write-ups, and daily macro opinions.
Analyst’s 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.
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