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Landmark Infrastructure Partners LP (NASDAQ:LMRK)Q4 2018 Earnings Conference CallFeb. 20, 2019, 12:00 p.m. ET
Contents: Prepared Remarks Questions and Answers Call Participants Prepared Remarks:Operator
Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2018 Landmark Infrastructure Partners LP Earnings Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions) As a reminder, today's program is being recorded. And I would like to introduce your host for today's program Marcelo Choi, Vice President of Investor Relations. Please go ahead.
Marcelo Choi -- Vice President, Investor Relations
Thank you, and good morning. We'd like to welcome you to Landmark Infrastructure Partners' fourth quarter earnings call. Today, we'll share an operating and financial overview of the business and we'll also take your questions following our presentation. Presenting on the call today are Tim Brazy, Chief Executive Officer; and George Doyle, Chief Financial Officer.
I would like to remind all participants that our comments today will include forward-looking statements, which are subject to certain risks and uncertainties. A number of factors and uncertainties could cause actual results in future periods to differ materially from our current expectations. For a complete discussion of these risks, we encourage you to read the partnership's earnings release and documents on file with the SEC.
Additionally, we may refer to non-GAAP measures such as FFO, AFFO, EBITDA, adjusted EBITDA and distributable cash flow during the call. Please refer to the earnings release and our public filings for definitions and reconciliations of these non-GAAP measures to the most comparable GAAP measures.
And with that, I'll turn the call over to Tim.
Arthur P. Brazy -- Chief Executive Officer
Marcelo, thanks very much, and good morning. Today, we are going to discuss our fourth quarter results, provide you with an update on our activities and review some of our recent developments and strategic initiatives including our FlexGrid program. But before George discusses the details of the quarter, I'd like to take a moment to highlight some of our 2018 accomplishments and recap the strategic shift we've undertaken as we move the company forward.
2018 our fourth year as a public company was another successful year for Landmark. During the past four years and particularly in 2018, we made a significant amount of progress growing the platform. The portfolio has continued to perform extremely well. A reflection of the high quality of the assets and the stability and predictability of the cash flows.
We've also developed a number of strategic partnerships with real estate providers, capital partners and existing tenants. While we continue our transition toward becoming a fully integrated real estate and infrastructure company. Since our IPO in November 2014, we've grown the size of our portfolio from approximately 700 assets at the IPO to a peak of over 2400 assets in the third quarter before our contribution of a portfolio of assets to the Landmark Brookfield joint venture back in September 2018. During that same period, we increased our revenue base to more than five times from approximately $13 million at the time of the IPO to annualize third quarter revenue of more than $70 million.
In terms of our overall business strategy, we continue to focus on the initiatives we've outlined on prior calls, and we're making substantial progress on a number of fronts. Focusing on our strategic partnerships, multiple FlexGrid development opportunities, and growing our portfolio to support structural alternatives for the partnership.
In our core ground lease business the fundamentals of our business are strong and our assets continue to perform very well, delivering stable and growing cash flow. We expect substantial growth in our industries going forward with major drivers creating significant opportunities for the partnership.
However, our near term focus will be primarily on our development activities. We are not doing any drop-down transactions from our sponsor, but rather limited direct acquisitions at higher cap rates to drive accretion. We will be flexible depending on the situation, but we see the greatest opportunity in continuing our strategic transition this year to focus primarily on our development initiatives.
We believe this will drive more accretion to the partnership while deploying less capital, better positioning ourselves for the potential conversion to an internally managed REIT. In January 2018, we did complete a $60 million drop-down acquisition and in total for the year we bought 231 assets, including 79 wireless communication, 145 outdoor advertising and seven renewable power generation assets for total consideration of approximately $136 million.
Those assets are expected to contribute about $10 million in annual rents, and we expect future organic growth to come from the typical contractual lease escalators, lease modifications and renewals. As far as other partnership activities go as part of our effort to develop new strategic relationships capital, operating and technology partnerships. The formation of our joint venture with Brookfield with the transaction in September was a significant event.
This strategic partnership with one of the leading global infrastructure investors allowed us to raise capital at a very attractive cost of capital, delever our balance sheet as part of our strategy to operate at lower leverage levels extend our reach and continue to fund more accretive development opportunities.
On prior calls, we've discussed our new operating model where our main focus near term is the development and deployment of the FlexGrid solution.
With the transition to 5G, there is a massive opportunity to address multiple use cases including the need for universal broadband and wireless connectivity, smart vehicles and transportation solutions, and critical services and infrastructure control sensor networks for all types of commercial applications to name just a few.
LMRK is uniquely positioned to address these opportunities with the FlexGrid solution for smart-enabled infrastructure offering all kinds of service providers of build-to-suit rapid co-location environment with customizable 4G and 5G telecom and energy benefits while creating the opportunity to lower operational costs.
Our FlexGrid solution will facilitate wireless carrier and services deployment on commercial properties, transportation systems and smart city deployments, all of which are part of our current market focus where wireless connectivity, greater capacity, and network densification with significant co-location of flexibility is required or desired.
We continue to make excellent progress with our various FlexGrid deployment projects and we are seeing greater activity in all of our target markets. These projects do have longer lead times than our core business and involve multiple parties including those strategic technology partners, real estate owners, and project tenants primarily the mobile network operators, but they do represent potentially very large development footprints and we believe there are significant growth opportunities here.
In terms of specific deployments we're progressing on a number of projects including the Dallas Area Rapid Transit project and a commercial project in partnership with the Canadian commercial real estate owner, we previously announced.
These current FlexGrid deployments are also templates for additional projects, and we are pursuing similar opportunities in those primary markets. Mobile network operators and other service providers have significant interest in the kind of turnkey saving opportunities that we can offer. With strong wireless industry fundamentals, the growth and the demand for data connectivity and especially the multi-year 5G deployment cycle along with the shift in the commercial economy that will result. There is considerable opportunity for FlexGrid going forward.
We expect our FlexGrid activity to accelerate in 2019 and will provide further details regarding these projects later in the year as we make further progress on the developments. Looking forward, we are excited about the progress we've made so far and the many opportunities that we see. With substantial industry drivers strong market conditions and significant FlexGrid development opportunities. We believe we are extremely well positioned to take advantage of our large and growing markets.
Our focus will remain on executing our current initiatives including the FlexGrid projects we've discussed and continuing to expand our development opportunities. We have a long runway of potential growth in all of our asset classes, and we remain focused on delivering sustainable returns and growth for our unit holders.
And with that, I'll turn the call over to George, who will provide us with a more detailed financial review of the quarter. George?
George P. Doyle -- Chief Financial Officer
Thank you, Tim. As Tim outlined in his remarks, we are pleased with the performance of our portfolio during 2018. This is the fourth full year from our IPO. With our portfolio continuing to demonstrate strong performance across all segments.
Our strong portfolio results have been driven by the high quality of portfolio, which has consistently delivered organic growth due to the escalators in our leases. As we head into 2019, we expect our portfolio to continue to perform well during the year.
Before I review the fourth quarter and the full year results. I'd like to highlight some of the changes to our operating model that we announced on the Q3 conference call. 2018 was a transformative year for the company, and we are well positioned as we head into 2019.
As we outlined during our third quarter conference call, we are focused on positioning ourselves for potential conversion to an internally managed REIT structure and took a number of steps in that direction. In Q3, we outlined our new model of operating at lower leverage levels, pursuing only direct acquisitions and development activities, and improving distribution coverage in retaining cash flow to self fund acquisition development activities.
With the JV transaction we completed in the third quarter and our line of credit refinanced in the fourth quarter, we are well positioned to execute on our near-term development opportunities under our new operating model. As at the end of the fourth quarter, we reduced our consolidated leverage level to 6.6 times adjusted EBITDA from 8.5 times a year ago.
While at the same time substantially improving our distribution coverage ratio year-over-year. As we head into 2019, we expect our distribution coverage to reach one time around the middle of 2019 as the impact of our line of credit refinance acquisitions are reflected for a full quarter in the escalators on our portfolio drive revenue growth. The impact of our development activities are expected to drive additional revenue growth and distribution coverage above one-time as assets are placed into service over the course of 2019.
With our new operating model, we have decided to change the nature of our guidance. Previously we've provided annual acquisition and to a lesser extent development guidance along with distribution growth guidance, as we're shifting in 2019 to a predominantly development model, which is inherently harder to forecast.
We are no longer providing annual acquisition development investment guidance. Additionally, our approach to retaining capital in the near term, we do not anticipate raising the distribution in 2019. Over the course of 2019, we will provide update on our acquisition and development activities.
Turning to our operating results for the fourth quarter. Rental revenue in the fourth quarter was $14.7 million, an increase of 2% year-over-year and a decline of 16% from the third quarter. As we outlined on our last quarter's call, the JV established with Brookfield in the third quarter is accounted for as an equity method investment and the results of those properties are not consolidated into our revenue and operating expenses, but rather we pick up our share of net income of the JV through equity income in the unconsolidated JV.
The assets that were contributed to the Landmark Brookfield JV generated rental revenue of approximately $3.5 million in the quarter. FFO per diluted unit was $0.01 this quarter compared to $0.48 in the fourth quarter of last year.
FFO tends to fluctuate quarter-to-quarter depending on the change in the fair value of our interest rate hedges. During the fourth quarter of 2018, we reported an unrealized loss on our interest rate swaps of $4.2 million compared to an unrealized gain of $1.8 million in the fourth quarter of 2017.
AFFO which excludes unrealized gains and losses on our interest rate hedges was $0.35 per diluted unit this quarter compared to $0.32 in the fourth quarter of last year. Turning to our balance sheet. We finished the fourth quarter with $155 million of outstanding borrowings under our revolving credit facility and secured notes were at approximately $224 million at the end of the quarter.
We finished the year with 100% of our outstanding debt either being fixed rate debt or borrowings that have been fixed through interest rate swaps. We ended the quarter with a consolidated debt to adjusted EBITDA ratio at approximately 6.6 times.
Turning to coverage. Our distribution coverage ratio improved in the fourth quarter to 0.95 times. We continue to make progress in restoring our distribution coverage back to above one times and expect to accomplish this goal around the middle of 2019.
As we have discussed on a number of occasions over the last year, our coverage ratio is significantly impacted by the timing of the raising of capital in a subsequent investment of that capital. We raised a substantial amount of capital through our Series C preferred offering and our formation of the JV for purposes of pursuing our development activities.
The raising of the capital is a dilutive impact until this deployed in the assets that are placed in service. We are expecting assets will begin being placed into service around the middle of 2019 and contribute to revenue in distribution coverage.
While we have decided not to provide 2019 acquisition and distribution guidance. We believe that we have the necessary capital to fund our development activities in acquisitions for the year and are not currently planning on any common equity offerings.
To summarize my remarks before we take questions. We have made substantial progress on our initiatives. We have substantially delevered balance sheet, significantly improved the distribution coverage ratio year-over-year. And we are well positioned to execute on our development initiatives as we head into 2019.
We will now take your questions.
Questions and Answers:Operator
(Operator Instructions) Our first question comes from the line of Ric Prentiss from Raymond James. Your question please.
Richard Prentiss -- Raymond James -- Analyst
Thanks. Good morning, good afternoon guys.
Arthur P. Brazy -- Chief Executive Officer
Hi, Ric.
Richard Prentiss -- Raymond James -- Analyst
Hey, couple of questions. First, I understand obviously not giving the guidance not making acquisitions, heard not anticipate any drop downs from the partner or you might do some direct acquisitions, but help us understand maybe a little bit on the development side. How much lead time is there typically on these type projects as far as when you need to spend the capital versus when you see the revenue and the EBITDA and what kind of total liquidity. Do you have available at year-end between cash and capacity on the different structures that are out there?
Arthur P. Brazy -- Chief Executive Officer
Sure. So, lead time, I would say, generally on projects before they start generating revenue is roughly six months. We've had to incur to date a bit of cost related to, I would say, legal some design work related to our solution.
But once we kick off the site-specific development, it's roughly about six months by the time you get through the permitting all the approvals that are necessary construct, and have a site ready for that tenant basically occupy the site which is when the revenue would commence under the lease agreements.
As far as the amount of liquidity we have right now with our debt covenants the way they're structured, we have roughly about $50 million or so of capacity before taking into consideration the revenue, that would be generated from the development.
So as we generate more revenue, our borrowing capacity goes up, the facility is essentially multiple, your borrowing base is a multiple of EBITDA. So, we have roughly about 50 million of room without generating revenue, I would say, is our current capacity.
Richard Prentiss -- Raymond James -- Analyst
Okay. Obviously, we were glad to see the G&A reimbursement get extended out. Can you talk a little bit about how you chose kind of the timeline as far as how much longer we get extended out and does that impact at all the potential conversion to an internally managed REIT?
Arthur P. Brazy -- Chief Executive Officer
Sure. Our goal is to be in a position to be able to contemplate that internalization transaction within, I would say, roughly about two to three years. So, when you look at the period of time that the G&A reimbursement arrangement was extended, it's roughly in line with that internalization target that we're currently thinking about.
We are also thinking about from the standpoint of given the current G&A rate, what's the potential growth of the portfolio revenue over the next two to three years, and based on that growth you -- would you really need to have a G&A reimbursement arrangement beyond two to three years and our current thinking is no that it could naturally fall off at that point in time. So, based on those, I would say, two factors we thought pushing it out in a couple of years was the right way to go.
Richard Prentiss -- Raymond James -- Analyst
Okay. And then final one for me. Can you update us particularly with the JV. Now, what is your exposure to Sprint and T-Mobile as that merger makes its way through the process of approval and decision. And also just what should we think of from an organic lease escalator modification renewal kind of growth rate on the more organic side of things?
Arthur P. Brazy -- Chief Executive Officer
Sure. So, our Sprint's revenue is right now is about 8% of revenue and our T-mobile revenue is about 10%. We think roughly if the merger goes through maybe about half of that Sprint revenue might be at risk. So, about 4% of our revenue.
As we've talked about a little bit for potentially a lot of that revenue is offset by virtue of there's modifications on other sites that T-Mobile has. There's likely some additional equipment that will be deployed relative to some of the spectrum holdings that haven't been fully deployed across the country. So, relatively small impact.
There is some Sprint in the JV as well, but it -- we only own 50% of that portfolio and for synergies and just likely to have too much of the impact on our overall results. The other thing as we continue to grow, we're most likely not going to be adding a lot of Sprint revenue.
So, where our exposure to Sprint right now is about 8% of our revenue. If you look out a couple of years, it's likely to be a smaller percentage of that making the impact of that merger even potentially smaller.
Richard Prentiss -- Raymond James -- Analyst
Okay. And then the organic leasing kind of what you're thinking that might be able to contribute then as far as escalators modifications renewals?
Arthur P. Brazy -- Chief Executive Officer
Sure. We're in a healthy part of the cycle right now with lot of the 5G and densification activity starting to pick up. So, overall, our contractual escalators are about 2.5%, which I would expect organic growth to be at least 2.5% looking into 2019 and potentially a little bit higher maybe in the 3% range depending on the amount of amendment activity that we see on our rooftop sites. So overall, it's good. We expect it to be a good year.
Richard Prentiss -- Raymond James -- Analyst
Very good. Thank you, guys.
Arthur P. Brazy -- Chief Executive Officer
Sure.
Operator
Thank you. Our next question comes from the line of Liam Burke from B. Riley. Your question please.
Liam Burke -- B. Riley FBR -- Analyst
Thank you. Good morning, Tim. Good morning, George.
Arthur P. Brazy -- Chief Executive Officer
Good morning.
George P. Doyle -- Chief Financial Officer
Good morning.
Liam Burke -- B. Riley FBR -- Analyst
Georgia, could you highlight how much was invested in Smart Grid in 2018 and is the first slug of investments. I know you had tenants lined up, but if I heard you correctly that the first slug of investments will yield revenue in the middle of 2019?
George P. Doyle -- Chief Financial Officer
Yes, that's right. So, we've invested in the FlexGrid project to date roughly about, it's about $25 million or so. We have a number of projects, DART, being one of the Canadian project as Tim mentioned that are progressing. We've executed MLAs with a number of tenants.
So, things are pushing forward, it's just. These are telecom deployments and they do take a bit of time to get traction and get the construction moving forward, but we're at a good point in the process where we expect to be doing a lot of construction in the Q2 timeframe, and then that's shortly thereafter we would expect that revenue to start kicking in on those developments.
Liam Burke -- B. Riley FBR -- Analyst
Okay. If look in the 2019, George, directionally how much incremental investment are you going to -- do you anticipate on the Smart Grid side?
George P. Doyle -- Chief Financial Officer
Well, that's a tough one to answer. It's heavily dependent on how much activity we see from the tenants that we have lined up, and that's probably the way or probably the reason why we've decided to shift away from providing the total development guidance. Is it just -- is particularly difficult to forecast you know what we can say though is, similar to what we said at the end of the third quarter is the volume of activity is picking up, and we do anticipate doing a lot of developments and getting those put into service during the course of 2019, but we're not ready to quite yet to put a number on that as we need to see more -- get more information from our tenants before we can quantify that.
Liam Burke -- B. Riley FBR -- Analyst
Great. Thanks, George.
George P. Doyle -- Chief Financial Officer
Absolutely.
Operator
Thank you. (Operator Instructions) Our next question comes from the line of Dave Rodgers from Baird. Your question please.
David Rodgers -- Robert W. Baird -- Analyst
Good morning, guys. Maybe just a little repetitive on the same idea, but can you guys give us a sense of what kind of the first year return looks like on the FlexGrid deployments versus kind of what your long-term expectations might be now that you're actually in the market and trying to build these with the telecom deployment tenant?
Arthur P. Brazy -- Chief Executive Officer
Sure. The return on expectations are consistent with what we have outlined previously that we should be able to get initial returns. So, yield on the investment at or better than where we've been targeting for our ground lease investments, which I would say recent is in the seven cap range.
Long-term that's what really where there's the greatest opportunity is. These developments are predominantly single-tenant developments. We do have some sites that we're currently targeting that are multi-tenant developments, but with lease we are potentially getting an additional tenant, you could certainly see that current yield or call it 7% double. It becomes very attractive because your incremental cost for a new tenant once you have the telecom infrastructure in place is pretty close to zero. There is not much we really have to do.
So, although the current yields are attractive on these developments. The long-term opportunity is pretty significant and it changes the potentially the organic growth profile of the partnership overall to the extent that we ultimately have a lot of revenue generated from these telecom development.
David Rodgers -- Robert W. Baird -- Analyst
And George just to be clear on your comment though agreement that you've announced so far Dallas, and the others, are those only single-tenant deployments. I wanted to just clarify that comment you just made in terms of are the ones that you've announced single tenant or do they have the possibility of being multi-tenant down the road?
George P. Doyle -- Chief Financial Officer
They have the possibility of being multi-tenant. It depends on the nature of what gets developed for the outdoor advertising piece for the DART project that's a single-tenant type arrangement. But the telecom component of that development would be a multi-tenant opportunity most likely it will get sponsored backed by a single carrier and then there will be room for other carriers to come on-board after it's developed.
David Rodgers -- Robert W. Baird -- Analyst
Okay, that makes sense. And then if you do have the ability to have excess cash flow or excess access to the (Technical Difficulty). Do you have your eyes that on any potential acquisitions or do you feel that the development pipeline is strong enough that you have additional uses of that capital?
George P. Doyle -- Chief Financial Officer
Right now the development pipeline is pretty healthy for, I would say, for the excess capital, but we'll see what acquisition opportunities come up over the course of the year and it's possible. There's something that makes sense to move forward on, but at this point we're not heavily focused on ground lease acquisitions, but we'll see what 2019 brings.
David Rodgers -- Robert W. Baird -- Analyst
Okay, great. Thank you.
George P. Doyle -- Chief Financial Officer
Sure.
Operator
Thank you. Our next question is a follow-up from the line of Ric Prentiss from Raymond James. Your question please.
Richard Prentiss -- Raymond James -- Analyst
Yeah. Hey, guys. I have couple of quick follow-ups. How do we think about, you mentioned, with the FlexGrid, Smart Grid that there are partners involved obviously walk us through the economics, is the 7% you're talking about cash on cash return for you guys or is that at the partner level of who is helping to build it. Just trying to think of how much ends up with Landmark?
Arthur P. Brazy -- Chief Executive Officer
Sure. When we talk about the 7%, that's a 7% on our called our net capital that's been deployed. So, that would be after any sort of operating expenses we might incur for to say. It would be after ground lease payments, property taxes any insurance that would be essentially the called the cap rate to us that we'll return on that investment.
Richard Prentiss -- Raymond James -- Analyst
Right. And if there were any partners I don't know I've never seen the final model as far as do you guys spent all the capital. Is there a partner who is contributing some of the capital to build these networks for these sites?
Arthur P. Brazy -- Chief Executive Officer
At this point it's all our capital, it's possible that if we expand the opportunity, that potentially would bring in another partner, another capital partner, but at this point right now, it's 100% the partnership's capital. So, we don't have to share any of that 7% or higher economics, if we lease upside.
Richard Prentiss -- Raymond James -- Analyst
Great. And then you mentioned obviously two to three years targeting conversion possibly to an internal managed REIT. As you think about those who do you view as the best comps in that universe of sub-sector within real estate and how do you view how they are structured from a leverage standpoint, from a yield standpoint, a growth standpoint who the constant kind of how do you think they're targeting the general financial world?
Arthur P. Brazy -- Chief Executive Officer
Well, that's a good question, and that's probably a lengthy discussion, but I'll try and summarize it as much as I can. You could certainly look at the tower companies as comps. It will depend on how much of our portfolio ultimately ends up being the infrastructure versus the ground leases, the ground leases have a typically viewed as being the more senior real estate interest then the tenant leases on towers, but they don't have the same growth profile.
So, there's some differences between our portfolio and what we would look like as an internally managed REIT to potentially tower company. But I would say they're probably the most similar comps when you look at their growth rates.
They're as you know they're high single-digit, low double-digit depending on the particular year leverage for tower companies ranges anywhere from in the 4s to, I think, in the 7 range, which is where our leverage over time is likely to range probably higher than 4, but not likely to on the long-term basis to be over 7 times.
Yeah, from a yield perspective there -- obviously they vary a bit they -- some of them have relatively low single-digit yields and they are increasing or have been increasing their distributions of late. Other potential comps you could look at potentially some of the triple net type real estate companies, they would potentially be a benchmark, they typically have higher yields, but they also payout, have a higher payout ratio on the distributions from a leverage level perspective, a lot of the REITs we might get comped to, might have a 35% to 40% leverage ratio, which if we're looking at our portfolio being around 6 to 7 times leverage that would put you roughly in that 35%, 40% loan to value leverage ratio.
So, I think, between those two groups there's probably some combination that comps that makes the most sense for us, but because we are the only mostly telecom ground lease public company, there isn't a specific comp, but I think when you look at the characteristics of those businesses and the portfolios, they probably make the most sense for purposes of comp in the company.
Richard Prentiss -- Raymond James -- Analyst
Okay. Yeah, it makes sense obviously there hasn't much comps previously, but maybe more and more comps become relevant.
Arthur P. Brazy -- Chief Executive Officer
Yeah, I think, that's right.
Richard Prentiss -- Raymond James -- Analyst
Okay. Thank you.
Operator
Thank you. And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to Brazy, CEO for any further remarks.
Arthur P. Brazy -- Chief Executive Officer
Well, a quick thank you to everybody for joining us today. I know it's a busy week, but as George and I have both said, we're confident in our ability to take full advantage of a large and growing market. We'll keep doing what we're doing and continue to execute on our plans for this year, and we'll share progress on the new initiatives with you as we can. Thanks for joining us this morning, and we'll speak to you next quarter.
Operator
Thank you ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
Duration: 37 minutes
Call participants:Marcelo Choi -- Vice President, Investor Relations
Arthur P. Brazy -- Chief Executive Officer
George P. Doyle -- Chief Financial Officer
Richard Prentiss -- Raymond James -- Analyst
Liam Burke -- B. Riley FBR -- Analyst
David Rodgers -- Robert W. Baird -- Analyst
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