Recently, I read an interesting infrastructure article by fellow Forbes contributor, Joel Moser, in which he wrote:
An infrastructure investor is primarily focused upon preserving value and providing moderate returns. As markets continue to converge to the point that most everything else is becoming correlated, the emergence of a range of infrastructure investment vehicles for investors both large and small is a welcome trend from a financial services industry still seeking redemption from its role in the global financial crisis.
Moser did an excellent job explaining the differences between real estate and infrastructure:
Like its investment asset class close relative real estate, infrastructure is a “real asset.” Indeed, infrastructure usually exists in the physical world as real estate – a physical asset permanently attached to the ground. But the similarity mostly ends there.
While real estate ownership can be forever, its current value at any given time is often linked to larger economic forces: correlated to the economy, so that a buyer’s interest is related to economic outlook, will things get better or worse, widely or at least for this particular piece of earth.
By contrast, infrastructure’s value is less correlated, that is to say its value may neither strongly increase nor decrease based upon larger economic trends.
As a REIT analyst these two worlds – real estate and infrastructure – have merged paths as allocations to listed infrastructure have been on the rise in recent years amid growing demand for real assets offering relatively predictable cash flows and the potential for attractive real returns.
As cash-strapped governments increasingly turn to private markets to fill a capital void, new security structures have been introduced globally, including those focused on income delivery.
Although rarely applied until recently, a REIT is a perfect vehicle that can be used to raise capital for infrastructure investments in “public-private partnership” transactions. In the abstract, REITs have certain advantages over the fund model as several favorable IRS private letter rulings sanctioning the use of REITs to own electric and gas distribution systems have increased interest in their role in infrastructure investments.
The Trump administration has shown a strong preference for funding investments from the private sector to pay for infrastructure priorities. The idea is to offer financial incentives to private companies that want to back transportation projects.
Under that model, known as a public-private partnership, firms bid on a project, build and maintain it for a set amount of time and recover costs through tolls or set state payments. Trump has argued that it’s cheaper and quicker when private investors are in charge, as opposed to the federal government.
Infrastructure REITs are Equity REITs that own and manage infrastructure properties and collect rent from tenants and they include American Tower (AMT), Crown Castle (CCI), CorEnergy (CORR), Hannon Armstrong (HASI), Power REIT (PW), InfraREIT (HIFR), SBA Communications (SBAC), and Uniti Group (UNIT). In addition, Landmark Infrastructure (LMRK) is a RECO (real estate operating company) that recently changed its legal structure moving the Partnership’s assets under a subsidiary that is now taxed as a REIT.
The company decided to make this change based on feedback from investors to broaden the investor base by substantially eliminating unrelated business taxable income, otherwise known as UBTI. It also significantly simplifies state income tax filings for LMRK unit holders. With this change, LMRK did not eliminate the Partnership structure since that will continue to give the company operating flexibility.
The Overview of Assets
LMRK’s real property interests underlie its tenants’ operationally essential infrastructure assets in the wireless communication, outdoor advertising, and renewable power generation industries. Effectively all of the company’s leases are triple, and its organic growth is through contractual rent escalators, lease modifications, and renewals (99%+ property operating margins, no maintenance capex).
LMRK sees many opportunities internationally as well as with operating partners that have a unique expertise and experience in industry relationships that complement the company’s efforts at the Partnership and the sponsor.
Within the wireless sector, LMRK’s Partnership sponsor and Ericsson recently announced the selection of Ericsson to deploy the Zero Site microgrid solution across North America.
The self-contained, neutral-host smart pole is designed for carrier and other wireless operator colocation, and the Zero Site is designed for macro, mini macro, and small cell deployments and will support IoT, carrier densification needs, private LTE networks, and other wireless solutions.
Ericsson microgrid includes battery storage applications and grid-control software. The Partnership will selectively deploy the Zero Site solution on its existing real estate interests, along with new acquisition opportunities.
LMRK’s asset portfolio represents less than 1% of the total U.S. market. The market is highly fragmented, as most individual property owners in this industry have only 1 or 2 locations (the No. 1 cellular tower company and the No. 1 billboard company own 10% or less of the land under their assets).
This is a growth-oriented MLP formed by Landmark Dividend LLC (the “Sponsor”) to acquire, own, and manage a diversified, growing portfolio of real property interests. As you can see below, American Tower, Crown Castle International, and Outfront Media (NYSE:OUT) – all REITs – are tenants of LMRK:
The company’s diversified platform provides stable and predictable distributions. Many of the locations/sites are difficult to replicate since they are located in major population centers (87% of revenues from Tier 1 tenants for their essential operations). The portfolio consists of 2,368 Assets diversified across 50 states, Washington, D.C., and various international locations.
No Cap Ex + High Dividend = Happy Investor?
The true value proposition for LMRK is that the company has no property tax or insurance obligations and no maintenance capital expenditures. The portfolio is 96% occupied (99% historical lease renewal rate) and has no commodity exposure. The company’s average lease term is 25 years:
LMRK’s underlying properties are operationally critical assets:
- Wireless – Highly interconnected networks; growing capacity/coverage
- Billboards – Key traffic locations, favorable zoning restrictions with “grandfather clauses”
- Renewables – Solar/wind corridors, proximity to transmission interconnects
The properties are difficult to replicate, with significant zoning, permitting, and regulatory hurdles in finding suitable new locations, including the time and cost of construction at a new site. Vacating tenants must often return the property to its original condition.
As viewed below, LMRK’s platform is highly desired by many Tier 1 tenants (many are large, publicly traded companies). No single tenant accounts for more than 15% of revenue:
Consider These Risks…
LMRK’s general partner and affiliates have conflicts of interest – LMRK and affiliates own a 24.4% limited partner interest in the company and control the general partner.
Also, unlike the holders of common stock in a corporation, unitholders have only limited voting rights on matters affecting the business, and therefore, limited ability to influence management’s decisions regarding the business. For example, unlike holders of stock in a public corporation, unitholders do not have “say-on-pay” advisory voting rights.
Unitholders did not elect the general partner or the board of directors of LMRK’s general partner and will have no right to elect the general partner or the board of directors of the company’s general partner on an annual or other continuing basis.
According to company CFO George Doyle, there “is some added flexibility by being an MLP. The REITs can generally only own 20% of their assets in a taxable REIT subsidiary. That’s one of the things that we have flexibility over, because we can create essentially a TRS directly under the MLP. We’re not subject to that 20% limitation, and then there are a few other advantages as well. So we think that for now, it’s a great structure. And we may never need that added flexibility, but we have it, and it was easier to basically create the REIT underneath the MLP at this point in time than it was to contemplate full REIT conversion.”
LMRK believes that its “aligned sponsorship model” will drive growth. Given its substantial cash investment and significant ownership position in LMRK, the company expects that its strategic sponsor will promote and support the success of the business (the sponsor contributed ~$60 million at the IPO, invested ~$39 million in cash and ~$21 million in rollover equity, and the sponsor owns LMRK’s General Partner all of the IDRs and a 15% LP interest).
As noted above, LMRK plans to form the REIT subsidiary for the primary purpose of eliminating unrelated business taxable income, otherwise known as UBTI. It also significantly simplifies state income tax filings for the unitholders. Keep in mind, this structure also creates complexity, especially as it relates to the management structure.
I would much prefer to see LMRK convert to a REIT or spin-off individual REITs specialized in their respective businesses. I certainly see the value of the Net Lease model in which the company can structure sale/leasebacks to create investment spreads, but the most successful Net Lease REITs will always rise to the top when they achieve the lowest cost of capital.
This Is What Gets My Shelf Space
LMRK has one of the highest dividend yields in the peer group:
LMRK recently announced the distribution of $0.3675 per common unit for Q4-17 (or $1.47 per common unit on an annualized basis), marking the 12th consecutive quarter that the partnership has increased its cash distribution since the IPO. This quarter’s distribution represents 5% increase year-over-year.
LMRK’s coverage ratio, which is defined as distributable cash flow divided by distributions declared on the weighted average common and subordinated units outstanding during the quarter, was 0.86 times in the fourth quarter. The coverage ratio was impacted by several factors, including the timing of capital raises and deployment of capital.
LMRK expects acquisition volume and development spending in the range of $250 million to 300 million in 2018; the company anticipates new development spending at approximately $50 million for 2018 as it continues to make progress on the growing initiatives in the pipeline.
As part of guidance, the Partnership sponsor intends to offer LMRK the right to purchase between $200 million and $250 million of assets in 2018. These acquisitions and developments, combined with organic portfolio growth, are expected to drive distribution growth of 10% over the fourth quarter of 2017 distribution of $0.3675 per common unit by the fourth quarter of 2018.
The recent tax reform changes are favorable to LMRK as the new law provides 20% deduction for dividend income and MLP Partnership income.
The Bottom Line
As I said above, a REIT is a perfect vehicle that can be used to raise capital for infrastructure investments in public-private partnership transactions and although Landmark is not a REIT (at the parent level), the modified reorganization of the legal structure now allows unit holders to freely purchase units without having to worry about generating taxable income sourced to states outside their own state of residency.
Before my recommendation, consider a few key risks: (1) LMRK is a small cap ($410 million) that means the shares are subject to outsized volatility, (2) LMRK has higher leverage than most REITs (65% debt to market cap), and (3) LMRK is externally-managed. Collectively, I consider Landmark speculative and my BUY recommendation is rooted in the higher-risk framework.
However, I find Landmark a very compelling infrastructure idea that could return outsized returns, over 40% annually. With just a handful of analysts covering Landmark, this pick could be one of the best kept secrets around – that is, before you read this article.
Note: Brad Thomas is a Wall Street writer, and that means he is not always right with his predictions or recommendations. That also applies to his grammar. Please excuse any typos, and be assured that he will do his best to correct any errors if they are overlooked.
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Sources for images: F.A.S.T. Graphs and LMRK Investor Presentation, unless otherwise noted.
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Disclosure: I am/we are long ACC, AHP, APTS, ARI, BRX, BXMT, CCI, CHCT, CIO, CLDT, CONE, CORR, CUBE, DDR, DEA, DLR, DOC, EPR, EXR, FPI, FRT, GEO, GMRE, GPT, HASI, HTA, INN, IRET, IRM, JCAP, KIM, LADR, LAND, LMRK, LTC, MNR, NXRT, O, OFC, OHI, OUT, PEB, PEI, PK, PSB, QTS, REG, RHP, ROIC, SBRA, SKT, SPG, STAG, STOR, TCO, UBA, UMH, UNIT, VER, VTR, WPC.
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