Landmark Infrastructure Is Poised To Profit
- By reviewing the price history below, you can see that Landmark has been a volatile stock, trading at a wide range.
- Let me be clear, I consider Landmark a “speculative” Buy and I would not encourage a retiree or pre-retiree (pretty much anybody) to invest large sums in the name.
- This appears to be the home run pitch of the year…Landmark is Poised To Profit!
On May 10, 2018, Downtown Investment Advisory wrote a bearish article on LMRK citing high leverage and more specifically the author called attention to LMRK’s preferred share issuance and “leverage for the preferred stockholder (that) rises to 10x-11x, in a subordinated position.”
You may recall that last March Landmark issued its Series C Floating-to-Fixed Rate Cumulative Perpetual Redeemable Convertible Preferred Units yielding 7.5%.
By reviewing the price history below, you can see that Landmark has been a volatile stock, trading at a wide range, as high as $19 per share, and as low as $13.
It’s important to note that Landmark’s platform is centered on essential infrastructure assets in the wireless communication, outdoor advertising, and renewable power generation industries, and effectively all of the company’s leases are triple net with contractual rent escalators (99%+ property operating margins, no maintenance capex).
Also, LMRK is actually structured as a Master Limited Partnership (or MLP), but the company has a REIT subsidiary that makes it more efficient (the company has eliminating unrelated business taxable income, or UBTI, and has significantly simplified state income tax filings for the unit holders).
In April another bearish Landmark writer said that “borrowing and issuing preferred stock to make lots of expensive acquisitions and pay distributions without increasing distributable cash flow per unit is not a sustainable business model and he went on to explain,
They (NASDAQ:LMRK) fail to take into account the fact that once an 8% (or up to 9% recently) preferred or common security is issued to refinance the debt that previously described “accretive” acquisition may become dilutive pretty quickly, especially when taking into account the issuance of new common units.
Readers should note that being “accretive to distributable cash flow” is not the same as being “accretive to distributable cash flow per unit”. From a common unit holder perspective, all one should care about is the latter.”
I caught up with Landmark’s CEO, Tim Brazy, recently and I asked him:
Are LMRK’s acquisitions accretive to distributable cash flow, even after the recent issuance of the Series C preferred units? Why issue more expensive preferred units to pay down cheaper debt?”
Yes, the acquisitions have been accretive to distributable cash flow. In our latest earnings call (February 2018), we disclosed that in 2017 LMRK acquired 350 assets (including the ROFO transaction that closed in January 2018) for total consideration of approximately $219 million with annual rents of approximately $16 million. This implies a cap rate of well above 7%, which is higher than LMRK’s blended cost of capital, even after the recent Series C preferred unit issuance.
Prior to the issuance of our Series C preferred units, our leverage was at the higher end of our 6-8x target leverage. Given our acquisition guidance for 2018, we would have needed to raise equity at some point in 2018. As the preferred units are viewed as equity from our perspective, and more importantly from a debt covenant perspective, we believe that it was prudent to raise equity through our Series C preferred issuance.
Since these are convertible preferred units, we are assuming that these will ultimately convert into common units as we execute our strategy. Rather than issuing common units at a discount to the current price, the convertible preferred allowed us to issue units at a lower current coupon, that ultimately convert into common at a 15% premium to the current unit price. We believe this provides us with a better cost of capital and is less dilutive to current unitholders.”
A Closer Look at Landmark: 3 Masters