RADI (2022 - Q2)

Greetings, and welcome to Radius Global Infrastructure’s Second Quarter 2022 Results Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jason Harbes, Head of IR. Thank you. You may begin. Jason Ha

Thank you, operator, and welcome, everyone, to the Radius Global Infrastructure Second Quarter 2022 Earnings Call. In a moment, Bill Berkman, our CEO and Co-Chairman, will provide an overview of our second quarter 2022 results, followed by a more detailed update from Glenn Breisinger, our Chief Financial Officer. After these comments, we will open up the call for your questions. Before we begin, I would like to remind everyone that many of the comments made today are considered forward-looking statements under federal securities laws. As described in our earnings release and filings with the SEC, these statements are subject to numerous risks and uncertainties that could cause future results to differ from those expressed. These statements speak as of today’s date, and we undertake no obligation publicly to update or revise these forward-looking statements. In addition, on today’s call, we may discuss certain non-GAAP financial information. Combine this information together with reconciliations to the most directly comparable GAAP financial measure in yesterday’s earnings release and the supplemental financial information available on our website at www.radiusglobal.com. Bill?

Thank you all for joining us today for our second quarter 2022 earnings conference call. As a brief reminder, we buy high-quality, long-dated, long-duration assets in increments over long periods of times, which we believe helps mute the effects of periodic headwinds from currency volatility as well as variations in asset pricing, competition and churn by borrowing in local currencies, redeploying local cash flows and averaging these effects over time. The growing base of our business is cash flow generated from some of the world’s most critical data infrastructure. Even amidst the current global economic and political environment, I’m pleased to report the continued resiliency and stability of our business as we continue to deliver what we believe to be downside-protected attractive returns. This is evidenced by strong growth in the second quarter where we now own over 8,500 lease streams on over 6,500 digital infrastructure sites in over 20 countries. These assets generated record quarterly GAAP revenue of $32.6 million, up 30% year-over-year, which is net of the impact of recent volatile foreign exchange rates. Leases in our large pool of high-quality triple net rents underlying mission-critical digital infrastructure assets enjoy the benefit of largely untapped inflation-adjusted escalator, and this quarter’s results show continued enhanced organic growth from these valuable lease provisions. As you will hear shortly, our rent portfolio had net organic annualized growth of approximately 3.7% in the second quarter, and we expect that organic growth to continue to rise to an annualized run rate of approximately 4% by next quarter as contractual inflation adjustments in our leases continue to kick in over time. As noted in our supplemental disclosures as of the end of June, 74% of our portfolio escalates annually, 5% escalates every 3 years and 18% escalates every 5 years. During the quarter, we invested approximately $180 million to acquire $12 million additional rent -- annualized rent increasing our total annualized in-place rents to a run rate of approximately $132 million, representing a 29% year-over-year increase. Total acquisition CapEx of $254 million for the first half of 2022, puts us on a trajectory to exceed our previously stated annual guidance of deploying $400 million plus of acquisition CapEx for the current calendar year. As we have previously noted, there will be quarterly variability in the amount of capital deployed. After making these investments, we now have over $600 million of cash on the balance sheet to be used for incremental value-accretive acquisitions and investments, which was raised both from equity issued as well as from debt facilities that are 100% fixed rate or capped interest only and with no near-term maturities. I say this every quarter, but it really bears repeating. I’m extremely proud of our global team for producing record results and meeting our high underwriting standards and our target returns, especially in this macro and economic environment. With the pace of capital investment into global digital infrastructure, supporting communication networks as well as data storage, processing and delivery continue to grow to meet demand, our addressable market and potential acquisition continues to grow and our range of asset types, we believe will continue to broaden, which provides our team of originators with a vast total addressable market of potential properties to acquire, where a substantial amount of these assets are owned by a highly fragmented set of landlords. While no business is free from the impact of macroeconomic forces, whether inflation, interest rates, FX or other factors, the fact that we’re able to continue to grow both organically from our own yielding portfolio of rents combined with new origination continues to reinforce our conviction in our business model. Glenn Breisinger, our CFO, will now provide an overview of our current holdings and financial results in more detail. Glenn?

Thanks, Bill. We continue to grow the portfolio in the second quarter, taking advantage of investment opportunities across our expanding global footprint to deploy capital. As of the end of June, as Bill previously mentioned, we own real property interest in over 6,500 sites with over 8500 lease streams represented by a tenant base comprised of 37% tower companies and 63% mobile network operators, the vast majority of which are investment grade. With respect to our $131.7 million of annualized in-place rents, as of June 30, 49% are denominated in euros, 15% in British pounds, 16% in U.S. dollars, 3% in Australian dollars, 1% in Canadian dollars and the remaining 15% in other global currencies. Approximately 85% of our rents are located in developed markets, with the remainder predominantly based in Brazil, Chile, Mexico and Colombia. Importantly, nearly 80% of our portfolio has contractual uncapped escalators that are either directly or indirectly linked to local inflation indexes, which provide us with meaningful protection against the impact of rising inflation, while also muting the impact of rising interest rates. The other 20% of our portfolio has contractual escalators that are generally fixed at between 3% and 5% annually. Geographically, these fixed escalator rents are predominantly located in the U.S., Canada and Australia. Cap revenues were up 30% year-over-year to $32.6 million in the quarter, and gross profit or what we refer to as ground cash flow rose 25% to $30.5 million, resulting in a gross profit margin of approximately 94%. Our ground cash flow margin has been impacted by expenses associated with fee simple interest acquired, primarily for property taxes. We deployed $179.5 million for acquisition CapEx in the second quarter, which represents a 43% increase from the $125.4 million we deployed in the second quarter of 2021. This record pace of investment resulted in $12.4 million of additional annual rent across 223 new lease streams. We anticipate that these new lease streams will generate a fully burdened initial cash yield of approximately 6.4% on a total gross spend basis, which includes approximately $13.4 million of origination SG&A that we spent in the quarter. Please note that this 6.4% when compared to previous periods does not reflect same-store sales as each quarter we are acquiring assets from a different mix of countries that have different acquisition, cap rates due to many factors that vary by jurisdiction. In the second quarter, our existing portfolio rents on a constant currency basis, excluding rents we acquired in the quarter, generated 4.7% revenue growth from the combination of our contractual escalators and organic revenue enhancements, which was partially offset by approximately 1% of gross churn, resulting in net organic revenue growth of 3.7% on a year-over-year basis. This compares to 2.9% net organic revenue growth in the second quarter of 2021. This increase is primarily due to our contractual inflation-based escalators which are beginning to reflect a significant increase in inflation across all of our jurisdictions. Turning to our balance sheet and liquidity. During the quarter, we refinanced our existing $103 million domestic senior-secured facility, which was scheduled to mature in October 2023, and we entered into a new $165 million facility. This loan accrues interest at a fixed annual rate of approximately 3.64% and is scheduled to mature in April 2027. This compares to an interest rate of 4.25% under the previous credit facility. As a result of the closing of the transaction, Radius received an A rating from Fitch for the facility which has a leverage cap of 9.75% eligible annual cash flow, defined as annualized in-place rents less a servicing fee. Inclusive of this recent refinancing, Radius now has approximately $1.6 billion of total gross debt outstanding and net debt of $953 million as of the end of the second quarter. Again, all of our outstanding debt is interest-only fixed rate or capped with a weighted average cash coupon of 3.6% and a weighted average remaining maturity of 6.0 years. The company had approximately $615 million of liquidity, most of which is available for incremental investment as of June 30. Please refer to our supplemental materials posted to our website yesterday after the market closed for additional details. Bill?

Thanks, Glenn. Operator, please open the call for questions.

Our first question comes from Ric Prentiss with Raymond James.

A couple of questions, guys. First, obviously, as we look at your external growth aspect, we look at pacing, pricing and funding. So the pacing was strong in the quarter. It can vary, as you point out. How lumpy was this quarter? When would you expect to actually update guidance as opposed to just say you could exceed it? So on the pacing side, that’s the first set of questions.

I think the best way to answer is it’s -- you’re never rewarded by giving even more specific guidance, even though we have pretty good visibility and high confidence, I think it’s just easier to leave it the way we left it. That being said, I’ll go back and give it a hard think whether we should live on the edge and try to update it a bit. But right now, I think you should take away from our statement that we’re optimistic about substantially being highly optimistic when we say that.

Okay. On the pricing side, cap rate came in, as Glenn was pointing out, 6.4%, I think we had modeled 6.2%. So it seems like even in this interest rate environment, you’re still bringing in attractive caps. You point out that can vary by country. How should we think about as you look into the future, where those cap rates are and how are seller expectations holding up in this kind of environment?

I think it’s always going to vary and there’s not really a set pattern. Clearly, if we’re competing with power companies, the seller is going to be benefited by that. When we’re not competing with them, I think that at some point, our expectation is that there will be some adjustment for just the current macro environment in terms of what sellers’ expectations are. It’s still a little early to tell because every country has got a different dynamic going on. I hope that helps, Ric.

It does. Also, the potential of recession in different markets out there, does that trigger a point? I know a lot of times the sale of an asset or a revenue stream, sometimes it’s personal life involved. Any thoughts that recession could actually cause more people to say, maybe it’s time to hit the bid on that offer?

Well, first of all, we hate to see people having to face some hardship, but that being said, yes, our expectation is it’s going to drive, hopefully, more sellers because at the end of the day, people typically sell. We’ve said this a lot. When they have a need for the capital or when they are free, just the macro environment or something happening with the carriers because the long one particular site because it’s so fragmented, and we can, of course, take risks on because we are so diversified. So long-winded way of saying, yes, we think that, that will probably be a pretty helpful win in the sales. The question is just when would it kick in? Is it a quarter from now or 2 quarters from now, that we don’t know.

Makes sense. And then on the funding side, both you and Glenn pointed out, the $615 million of cash equivalents left. How should we think about that as runway 3 quarters, 6 quarters? And when and how would you think about kind of reloading on the funding side?

I think, and this is going to sound flippant and funny, I mean, we always hope to spend it all in the quarter. That means we’ve done our job and we’re finding great opportunities. Now all that being said, we’re in the business of having an acquisition machines, we’ve constantly got to feed it. So you always have initiatives going on that are originating new debt facilities or refinancing that we have and adding on to the debt facilities. And that I can say is in process. And then episodically, periodically, we’ll raise equity capital because you’ve got to support your acquisition as you can’t just do it on debt, you need to have equity as a base. And I think there’s a lot of tools in the toolbox for us to do that, ranging from whether it’s the overnight offering if we like the price in which we can raise money at, forming JVs and bringing an investor into a JV-type structure. I guess we could always think about recycling an asset and selling some of them. But these are just tools in the toolbox, and we’ll face that as we project out what our capital needs are and what we actually think we’re seeing in visibility for our pipeline.

Our next question comes from Sami Badri with Credit Suisse.

Bill, I wanted to spend some time just talking about the escalators, and you’ve clearly made some progress with this getting at contracted escalators of 4.2%, 2Q 2022. One thing that, I guess, a lot of us wanted to understand, given that a lot of your business is globally distributed, how do these negotiations really go? And how -- like how much more runway do you have to negotiate escalation in a world where inflationary dynamics begin to improve, right? So could you kind of give us how these negotiations go, if there is a cap -- when does the cap conversation come in? How much longer do you guys have from a runway perspective to keep escalating, just giving us like a little bit of a download on that dynamic would be very helpful.

I think the first thing we need to think about is just when does the lease expire. And I don’t know exactly if we’ve disclosed what our average weighted lease is. So the only time you get to then have a negotiation is on lease expiration. And when we think about it, I guess, there’s 2 approaches to lease renewal for us. One is going to a higher level with some of our larger tenants and having discussions whether or not it makes sense to do some type of mastering arrangement and what are the ways that we can construct a win-win with our tenants. Because I mean, I think that’s always the goal because you want to see you as a partner and for us to see them as a partner because I think it just lets us see what we want to be, which is a very long duration, good landlords and just do our job. Now all that being said, right now, you’re seeing, of course, escalation simply because that’s what our contracts permit us to have. Now they’ve had 20 years, 30 years where inflation really was never a problem. So if you have a couple of years where inflation went up, I don’t think that it’s -- we haven’t seen them give -- we haven’t seen a give pause to any of our tenants because none of us expect inflation to meaningfully last for decades or anything like that. So that when leases roll off, there’s simply a bucket of leases, and we typically negotiate them one-off with each of our tenants and someone who’s basically local to that country where that asset is located. I hope that helps, Sami.

Yes. So could there be a scenario where your escalators go up to like, say, 7% or 8%, right, assuming ongoing macroeconomic dynamics continue? Is there like a scenario for that to actually happen in this model?

Yes, absolutely because we’ve got contracts, right? And so depending on when -- if the contract’s got another 8 or 9 or 10 years left to go, then yes, of course.

Got it. My other question is on adjusted EBITDA. So you definitely took a step-up in the quarter. Was that management being more conscious or -- sorry, more cost conscious or was that the origination team being more productive or maybe...

I’ll refer to Glenn on this.

That’s an origination team productivity, Sami, for sure, relative to the revenues generated in the cost to acquire them.

Just to remind you, I typically personally look -- we probably in breaking out and calling attention to origination SG&A because to us, even though the accountants don’t let us do it, it’s all part and parcel of what we really view as our acquisition costs, right? That’s why we focus on annualized in-place rents, I mean you know all these things.

Yes, absolutely. So my last question really is, you guys managed to deploy a lot of capital in 2Q of ‘22 and you’re talking about being optimistic on going above your actual $4 million guided range. And we are in this economic inflection type time period. Would it kind of be assumed that team origination productivity continues to increase and capital-deployed opportunities also remain very significant and therefore, like 3Q ‘22 CapEx deployed or spend could be pretty significant as well, very comparable to 2Q?

I think what I want to do is discuss with Glenn, perhaps we’ll think about updating our guidance. Because I hear what you’re asking, and we want to be mindful and respectful to give as much information as we feel comfortable in doing. I rather just today, say, we’re highly optimistic that we can find opportunities where we believe we can achieve the returns that we want given the risk requirement we have in our underwriting standards. And you remember, we’re also always looking left and right to try to identify other similarly situated infrastructure assets tied to this digital evolution that gives us all the kind of attributes that you’ve heard us say in the past, meaning that they’re essential, they’re mission-critical, i.e., long-winded way of saying they stand the test of time. So hopefully, that will also allow us to expand both our addressable market of what we can go after as well as achieving our short-term goals for originating.

Our next question comes from Simon Flannery with Morgan Stanley.

You talked about the importance of the past, the escalators coming through. I think you said most of them are annual escalators. Is there a kind of a seasonality to them? Or is it fairly smooth through the year? Is it really bunch up at year-end? If there’s any color there?

I think in our release, we actually broke it out. Glenn, do you have at your -- can you just take...

Yes, that’s correct. So Simon, there is not really seasonality because you can imagine what was the size of a portfolio we’re acquiring assets at various times that have various start and end dates on their in-place contracts. We did break out the escalation frequency. And you can see that almost 75% is annual. I would point out that in Q1 2021, that was 64%. So we’re moving to more annual escalators and away from a 3- and 5-year term escalators based upon how we’re acquiring assets.

In our release, what were the actual breakdown? You sort of let Simon know or point to it?

Yes. So we’ve disclosed in our supplement here, 75% or 74.5% are annual. Obviously, we’ve consistently described it to or have no escalators when we acquired the assets appropriately, 5-year escalators were 18% and 3-year escalators were 5%.

Appropriately it means -- it’s priced in to get us the return we want, of course.

And obviously, the currencies moved pretty sharply year-to-date. Can you -- how are you thinking about things like hedging and any other steps you can take to reduce the volatility around that?

I don’t know if we can reduce "volatility." I mean, we have -- we constantly look at the hedging techniques that are out there, but we say to ourselves the following, which is because we run at a certain level of leverage, you’re effectively taking a lot of what would otherwise be equity in, you’re taking it out, so you’re running with less equity. So when you have the volatility, of course, your actual debt outstanding declines, it’s in local currency, the actual interest amount you pay also declines. And so what happens then is when you really look on our levered recurring free cash flow, the impact actually isn’t so meaningful. It’s a couple of percentage points for any given quarter if currency goes against that. Now all that being said, we sit with a lot of cash in U.S. dollars. So then, of course, we’re using U.S. dollars that are strong and then go buy assets in a currency that’s declined. And we try to go even faster in those situations because if we have a view that the currency -- the U.S. is going to remain strong or even get stronger, it behooves us to continue to buy assets. So I guess when we’ve looked over and stress tested it over a longer period of time, 5 to 10 years, this is not meant to simplify too much. But I guess we used the word muting because that duration sort of picked out some of the volatility you’ll see quarter-to-quarter. And it’s really a dollar cost averaging type of approach. And it today has worked very well for us. I mean we wouldn’t do hedging. We do look at it constantly.

Great. And then just coming back to the M&A, great to see the transaction volume this quarter. Can you just give us a little bit more insight into what you’re seeing in the marketplace? Because I think if you look at the broader M&A market, there’s been a significant reduction in deals, and there’s I think others have talked about mismatch between seller expectations and buyer willingness to pay. So there’s been a little bit of a pause or a slowdown in activity, but that doesn’t seem to have affected you. So how would you describe what you’re seeing in the marketplace and how that’s evolved over the last few months?

I think it goes to the core thesis behind our business, which is that we are willing to roll our sleeves up and to do so many discrete deals ranging from a size probably of $50,000 to $100,000 sort of as an average. And then we do some of the fiber aggregation points, those can be a lot larger. And sometimes they come in portfolios where we’ll buy a portfolio, which would make it a little more lumpy and a little larger size. But when we say larger size, a $10 million deal, a $30 million deal, it’s not the same as probably the M&A that you’re referring to because it’s just a bigger scale and because we’re willing to try a many, many smaller deals and aggregate it all together. I think that and our team of originators across 20 countries gives us what we think is a real competitive advantage in the marketplace to put capital to work. But we’re working hard.

Great. And just 1 lastly, you’ve got -- on the SG&A side, how are you managing inflationary pressures there since labor has been very tight...

A big part of our SG&A, as you know, is personnel, right? And so what we want to do is make sure that when people are really performing and doing a good job, I’m awful paying them a lot and making sure we keep our team really well incented and growing the ore all in the right direction. So I don’t think and maybe I defer to Glenn that we’ve seen the inflationary pressures have too much of an impact, but I’d probably be speaking too quickly. Glenn, is there anything I’m missing?

No, no, you’re not missing anything, Bill. That’s all appropriate. I would say this great, Simon. If you think about the bulk of our SG&A spend is relating to acquiring the assets, and so it’s effectively in our 6.4% cap rate, which has been consistent. So it’s incumbent upon us to look at any inflationary costs that we have in our SG&A spend to couple that with how we’re pricing assets to make sure we get an appropriate return.

And one last thing I’d add, Simon, and you’ll laugh when I say this. But because we’re putting all of that origination in SG&A, and we view it as part of just the asset price, while we are not permitted to account for and capitalize in part of the way we’d like, the IRS, of course, and you heard me say this gives us the right to deduct that. And so every time you look at that part of SG&A, it’s like a $0.21 reduction because that’s our corporate tax rate at the holding company. Clearly, there are local taxes, which we do have to pay periodically.

There are no further questions in queue at this time. I would like to turn the call back over to Mr. Berkman for closing comments.

Thank you, operator. Hey, thanks, everybody, for joining us today in August. I hope everybody has a great end of the summer. Again, I just want to repeat that super proud of our team and what they’ve been able to achieve this quarter and I’m hopeful and both excited to have us generate increasing acquisitions that we think are compelling. Thank you very much, everybody.

Thank you, everyone. You may disconnect your lines at this time, and have a great day.