I recommend a Buy rating for Radius Global Infrastructure (NASDAQ:RADI) with a price target of $17, representing a 14.5% total return over the next twelve months. RADI is a growth story that I estimate will be able to grow NAV/share at a CAGR of 13.1% over the next five years through a combination of:
While investors may view RADI with caution given its recent public market debut via a SPAC transaction, I think RADI’s experienced management (over three decades of experience) and irreplaceable acquisition platform will be able to demonstrate its ability to execute over the next year, resulting in greater investor interest in the name.
Given the many legalistic nuances that exist in regards to communications infrastructure in the 21 countries that RADI operates in, management has spent the last decade: (1) amassing a database of over 700k landlord addresses and (2) building an in-house acquisition platform that employs 150 skilled originators with expertise in each of the 21 countries that RADI operates in. RADI’s acquisition platform has enabled the company to build a portfolio of $117.9mn of annual in-place rents (+40% y/y), consisting primarily of land under towers and rooftops, and going forward will be able to grow its portfolio at a significantly faster clip now that it has access to the public equity markets. This provides a significant barrier to entry that is unlikely to be breached by a traditional net lease investor that does not have the expertise and platform that RADI has developed.
Given the fragmented nature of the industry (the land beneath communication towers is often owned by farmers and local businesses that have little to no connection with the cellular industry), the origination process is both time-consuming and expensive (growth SG&A costs were 43% of RADI revenue in 2021), making it unlikely that other passive net lease real estate players would consider entering the space without a significant strategic advantage. While these SG&A would be capitalized under U.S. GAAP if they were outsourced to a third party, because RADI utilizes its in-house acquisition platform, the costs are expensed, but should be viewed through the lens of growth CapEx.
Out of the $117.9mn of annual in-place rents currently in RADI’s portfolio, 63% comes directly from mobile operators (e.g. AT&T, Verizon) and 37% comes from tower companies (e.g. American Tower (AMT), Crown Castle International (CCI)). In terms of risk, RADI’s ground lease equity carries the lowest risk in the communications infrastructure capital stack and therefore should trade at a premium to the valuations of the other equity stakeholders.
RADI’s leases are spread across 6.2k sites in 21 countries. RADI’s portfolio is unique in that it is the only public company that derives 100% of its revenue from communications infrastructure (peer Landmark Infrastructure Partners (LMRK) derives ~60% from communications infrastructure with the remainder coming from other sources). Furthermore, LMRK has a more complicated MLP structure and is approximately one third of the size of RADI in terms of market capitalization.
RADI’s tenants have high credit quality (80% of its top 20 tenants are investment grade) and are poised to see continued secular tailwinds as mobile data consumption is expected to grow 20-30% annually through 2026 depending on geography.
RADI’s assets are truly mission critical and management believes that its tenants would rather default on its senior debt than miss payments to RADI, since the latter would result in the company’s operations and revenues ceasing entirely. The mission critical nature of communications infrastructure is evident as carriers have historically declared bankruptcy while remaining current on tower payments.
RADI’s international presence ensures that it has minimal exposure to any given tenant and reduces its risk to tenant consolidation (e.g. T-Mobile/Sprint consolidation only affected US properties). While RADI has substantial exposure to foreign currencies, the vast majority of RADI’s international leases have floating rate escalators which act as a partial hedge against FX volatility.
70% of RADI’s leases utilize a net lease structure that sees lower and more stable growth than traditional tower companies, and have rent escalators that average 3.0% as of 4Q21. This 3% level is nearly double that of traditional Net Leases escalators and has provided growth in excess of inflation historically. While terms like “transitory inflation” have dominated financial news headlines recently, 78% of RADI’s leases are floating and based on CPI or a similar inflation metric providing an inflation hedge to much of RADI’s revenue.
Since much of the land beneath communication towers are owned by farmers and local businesses that have little to no connection with the cellular industry, many of the leases that RADI acquires are initially below market. This creates an opportunity for RADI as it can mark the lease to market upon lease renewal providing an additional 1-2% of organic internal growth. While lease up related growth for RADI maybe be lower than Tower companies that typically see lease-ups in the 4-6% range, RADI provides a lower risk investment stream through ground leases that are not as directly exposed to risk from carrier consolidation.
Due to the mission critical nature of RADI’s assets and expensive relocation costs, RADI’s churn averages only 1-2%, about half of which is unanticipated resulting in a -75bps drag on organic growth.
All in, I estimate net organic growth of 3.75%, which is significantly higher than traditional net leases where the best-case scenario (i.e. no occupancy loss) is the in-place lease escalator of 1-2%. While I think the rollout of 5G will cause higher than historical internal growth in the near term, I assume a 3.75% growth rate in RADI’s NTM NOI estimate since it best reflects the long-term growth rate of NOI.
Unlike traditional net leased properties that have a finite amount of square footage that can be leased to a tenant, towers are able to grow revenue internally through densification (i.e. the tower adds multiple tenants to the same tower). While this may not appear to have an immediate impact on RADI which owns the land beneath the tower, there is an eventual flow through impact as RADI will seek to negotiate higher rent when the lease rolls. Near term, I estimate RADI will see elevated demand from tenants as 5G networks are rolled out by major carriers into the middle of 2022.
RADI’s small size (~$1.4bn market cap) and fragmented market in which it operates (RADI owns 6.2k sites compared to >5mn sites worldwide) puts it in an opportunistic position to pursue almost perpetual external growth that can drastically move the needle given RADI’s small relative portfolio size. RADI management deployed $474mn of origination CapEx in 2021, while noting on the company’s 2Q21 earnings call that it has been difficult to deploy capital in countries where face-to-face deal making is still the norm.
I estimate that RADI can deploy $400mn of origination CapEx in 2022, which I think is likely conservative given management’s strong track record during the pandemic. While the law of large numbers would indicate an inevitable deceleration of future growth, because of RADI’s small size, a ~$400mn annual run-rate of origination CapEx, still represents an asset base growth of 13.5% in 2027.
At current price levels, I estimate that RADI trades at an implied cap rate of 5.2% which is >150bps inside of where it has been deploying capital (yield of 6.8% in 2021) giving it the best cost of capital relative to investment opportunity among peers. Assuming management is able to keep up its CapEx deployment pace (which management indicates it can), I estimate that RADI will be able to grow its asset base by 27% in 2022, resulting in AFFO per share growth of more than 15% from external opportunities alone.
RADI went public in 2020 via a Special Purpose Acquisition Company (SPAC), and therefore has a corporate structure that is more complicated than most real estate companies. While RADI provides its potentially dilutive securities in its supplemental package, the company does not include the impact of these securities in its diluted share count. In 2021 RADI reported a WA basic and diluted share count of 71,083,353, which as shown on page 13 of the 4Q21 supplemental package, does not include either the outstanding options or warrants on RADI’s Class A Common Stock. For modeling purposes I have used the Treasury Stock Method to calculate a diluted share count that I think more accurately reflects the economic reality of the potentially dilutive securities. Based on my calculations, RADI should be reporting a diluted share count that is 8.7% greater than what it is currently reporting. While I do think that 8.7% is material and could serve as a negative catalyst if investors eventually come to a similar realization that I have, I do not see this as having a material impact on the long term profitability of the company.
While real estate investors may initially view RADI as a nascent real estate company with little track record given that the company just went public in 2020 via a SPAC transaction, RADI’s operating business was founded in 2010 by an experienced management team with ample experience in the telecommunications industry. I think that as investors realize the strong track record of management and realize that despite RADI’s small size, management has been in the communications infrastructure game for several decades, shares will eventually re-rate incrementally to a more appropriate level.
RADI is not a REIT and therefore does not report Funds From Operations (FFO) or Adjusted Funds From Operations (AFFO). However using the NAREIT definition for FFO, incorporating the adjustments that management uses to arrive at its reported Adjusted EBITDA, and further deducting additional non-cash line items that the company discloses (the company does not provide any detail around straight-line rents), I have calculated an AFFO per share metric that I think is comparable to peers.
On an absolute basis, and given that RADI is still rapidly growing and reports EPS that is negative, I conducted a Discounted Cash Flow (DCF) analysis to arrive at an estimate of intrinsic value. With a 2022 base year and assuming 3.75% organic growth and no additional capital deployment, I estimate that RADI has an intrinsic value of $18.38. Based on a share price $14.85, RADI trades at a 19.2% discount to its intrinsic value.
Landmark Infrastructure Partners (LMRK), which is RADI’s closest peer, announced on August 23, 2021 that it is to be acquired for a price of $16.50 per unit (LMRK is structured as an MLP), by the partnership’s sponsor Landmark Dividend. The $16.50 take out price represents a 38% premium to where the company was previously trading, and represents a 12x multiple to LMRK’s 2020 AFFO/Share. To assess the likelihood of a strategic outcome where RADI is acquired by a private sponsor, I conducted a Leverage Buy Out (LBO) analysis. Assuming management stays in place and continues to execute on its strategy of growing the company, capital costs remain constant, and a financial sponsor is willing to pay a 25% premium to RADI’s current share price, I estimate that a private sponsor could generate a levered return of 10.5% over the next five years by taking RADI private. Given the accretive levels of capital that RADI currently has access to and a levered return below a 20% threshold, I don’t think that strategic alternative are likely to be in RADI’s future assuming share prices don’t fall significantly from current levels.
In terms of AFFO multiple, RADI trades at a premium to traditional Net Lease REITs (i.e. National Retail Properties (NNN), Realty Income (O), Spirit Realty Capital (SRC)) and inline with Tower REIT peers (i.e. American Tower (AMT), Crown Castle International (CCI), SBA Communications (SBAC)).
In terms of AFFO growth, I estimate that RADI will be able to grow AFFO/share by a CAGR of 17.3% over the next five years through a combination of internal and external growth. This compares to Tower REIT peers and Net Lease REIT peers that have been able to grow AFFO / share by a CAGR of ~10% and ~2% over the last two years, respectively.
I estimate that RADI trades at a 12.4% Premium its Net Asset Value (NAV) of $13.22. To arrive at an appropriate cap rate for RADI’s NOI producing assets, I assume that RADI’s US assets currently in its portfolio (39% of NOI) would trade at a 5.5% cap rate. Given lower inflation and interest levels in the United Kingdom (20% of NOI) and Continental Europe (18% of NOI), I estimate that RADI’s assets there would transact at cap rates of 5.25% and 5.0%, respectively. RADI’s remaining assets in its “Other” category constitutes primarily adjacent assets that I apply a 6.75% cap rate to given the general ambiguity of the assets and the lack of direct exposure to industry tailwinds.
While investors may point to RADI’s higher leverage level as a justification for its lower valuation vs. peers (RADI currently has leverage of 6.2x on annualized In-Place rents vs. peers in the 5.5-6.0x range on EBITDA), I think that investors are missing the fact that RADI’s rental streams are inherently lower risk than peers making RADI’s leverage levels sustainable. Nonetheless, I think that higher debt levels could continue to hang on the stock, which is why I do not expect RADI to re-rate to levels that are above peers.
On a forward basis, I estimate that RADI will be able to grow its NAV / share to over $24 by 2026 (a CAGR of 13.1% over the next five years). I think RADI will be able to achieve this level of growth through a combination of internal organic growth and external growth in line with what management has been able to execute on in the past year.
To arrive at a twelve-month price target of $17, I apply a 10% premium to RADI’s 4Q22 NAV / share of $15.72, which I think is warranted given RADI’s lower risk profile relative to Tower peers and higher growth trajectory vs. Net Lease REITs. My $17 price target represents an 14.5% total return from current levels, and consists of a 19% return due to NAV growth and a -4.5% loss due to near term rerating, as real estate focused companies see negative fund flows as interest rates rise from their current low levels.
$20 price target represents a 34.7% total return and assumes RADI's stock trades at a 15% premium to its NAV, +4.75% organic growth, and $600mn of real estate acquisitions at a 7.75% acquisition yield.
$17 price target represents a 14.5% total return and assumes RADI's stock trades at a 10% premium to its NAV, +3.75% organic growth, and $400mn of real estate acquisitions at a 6.75% acquisition yield.
$15 price target represents a 1.0% total return and assumes RADI's stock trades at a 5% premium to its NAV, +2.75% organic growth, and $200mn of real estate acquisitions at a 5.75% acquisition yield.
Given that RADI went public via a SPAC in 2020, it is possible that SPAC and PIPE shareholders could off-load shares leading to downward price pressure in the near term.
While I do not see this as having a material impact on the long term profitability of the company, investors becoming aware of RADI's diluted share count level that better reflects economic reality could serve as a negative catalyst if investors come to a similar realization that I have.
Geopolitical instability in Europe could impact rent collections and/or increase foreign currency risk given that RADI derives 45% of its in-place rents from continental Europe, and 18% of its in-place rents from the United Kingdom.
Given RADI's real estate footprint, I think it is likely that RADI will convert to a REIT as taxable earnings turn positive in order to reap the tax benefits of the REIT structure. However, given RADI's current negative taxable earning I don't see this as a likely outcome until after 2025.
Given that 78% of RADI's escalators are inflation linked, a continuation of elevated inflation could lead to near term internal growth exceeding that of peers.
As 5G is rolled out by major carriers, RADI could see a near term increase in demand for tower space starting in 2022.
RADI's unique positioning in the telecommunications infrastructure industry allows it to pursue almost perpetual external growth with limited competition given the high barriers to replicate RADI's acquisition platform. While RADI's ground leases provide the lowest risk in the communications capital stack (an industry with near term tailwinds as 5G is rolled out), RADI's weighted average escalator of 3.0% is nearly double that of traditional net lease REITs that invest primarily in bricks & mortar retail. I estimate that the aforementioned company specific and industry wide tailwinds will propel RADI's best in class NAV / share CAGR of 13.1% over the next five years providing investors with the highest growth and lowest risk in the communications infrastructure industry.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.