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spk01: Greetings, and welcome to RADIUS Global Infrastructure's second quarter 2022 results conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jason Harps, head of IR. Thank you. You may begin.
spk02: 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. You can find this information together with reconciliations in the most directly comparable debt financial measure in yesterday's earnings release and the supplemental financial information available on our website at www.radiusglobal.com. Bill?
spk04: 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 and 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 gap 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 three years, and 18% escalates every five years. During the quarter, we invested approximately $180 million to acquire $12 million in additional 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 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, 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 of 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 rent, combined with new origination, continues to reinforce our conviction in our business model. Ben Breisinger, our CFO, will now provide an overview of our current holdings and financial results in more detail. Ben?
spk06: 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 interests in over 6,500 sites, with over 8,500 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 and placed rents, as of June 30th, 49% are denominated in euros, 15% in British pounds, 16% in US 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 US, 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 growth 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 of 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, rated 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 borrower 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 30th. Please refer to our supplemental materials posted to our website yesterday after the market closed for additional details. Bill? Bill?
spk04: Thanks, Glenn. Operator, please open the call for questions.
spk01: Thank you. We will now conduct a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, that's star 1 at this time. One moment while we post our first question. Our first question comes from Rick Prentice with Raymond James. Please proceed.
spk05: Hey, Rick. Good morning, everyone. Good morning. Hey, two questions for you guys. Oh, it's great. Great to be here, Papu. Thanks for that. A couple 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.
spk04: You know, I think the best way to answer it is 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 beating it. Highly optimistic when I say that.
spk05: On the pricing side, cap rate came in as Glenn was pointing out It's 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 it 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?
spk04: Well, I think it's always going to vary and there's not really a set pattern. Um, clearly if we're competing with power companies, the seller is going to be benefited by that. Um, when we're not competing with them, you know, I think that at some point our expectation is that there'll 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's got a different dynamic going on. Um, I hope that helps Rick.
spk05: 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 bit on that offer?
spk04: Well, first of all, we hate to see people having to face some hardship, but that being said, yeah, 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 afraid just of the macro environment or something happening with the carriers because they'll own 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, yeah, we think that that'll probably be a pretty helpful win in the sales. The question is just when would it kick in? Is it a quarter from now, two quarters from now? That we don't know.
spk05: That makes sense. And then on the funding side, both you and Glenn point out the $615 million of cash equivalents left. How should we think about that as runway cash? three quarters, six quarters, and when and how would you think about kind of reloading on the funding side?
spk04: Well, I think, and this is going to sound flippant and funny, I mean, we always hope to spend it all in a quarter. That means we've done our job and we're finding great opportunities. Now, all that being said, you know, we're in the business of having an acquisition machine, so we've constantly got to feed it. So you always have initiatives going on that are you know, originating new debt facilities or refinancing what we have and adding on to the debt facilities. And that I can say is in process. And then, you know, episodically, periodically, we'll raise equity capital because you've got to support your acquisitions. 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, you know, an investor into a JV type structure. I guess we could always think about recycling an asset and selling some of them. But, you know, these are just tools in a toolbox and we'll face that as we project out what our capital needs are and what we actually think we're seeing invisibly for our pipeline.
spk05: Great.
spk04: Thank you so much, everyone. Stay well. You too. Have a good summer.
spk01: Our next question comes from Sammy Badri with Credit Suisse. Please proceed.
spk04: Hey, Sammy.
spk03: Hey there. Good morning, everyone. 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% to Q2022. You know, 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 much more runway do you have to negotiate escalation in a world where inflationary dynamics begin to improve? Could you 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 a little bit of a download on that dynamic would be very helpful.
spk04: I think the first thing you need to think about is just when does a lease expire? And we, I don't know exactly if we've disclosed, you know, what our average rate of lease is. So the only time you get to then have a negotiation is upon lease expiration. And when we think about it, I guess there's two 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 mastery arrangement and what are the, you know, ways that we can construct a win-win with our tenants. Because, I mean, I think that's always the goal because you want them to see you as a partner and for us to see them as a partner because I think it just lets us be what we want to be, which is a very long-duration good landlord 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, you know, we haven't seen them 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, they're 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. Hope that helps, Annie.
spk03: Yeah, 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?
spk04: Yes, absolutely. Because we've got contracts, right? And so depending on when, if the contract's got another eight or nine or 10 years left to go, then yes, of course.
spk03: Got it. My other question is on adjusted EBITDA. So you definitely took a step up in the quarter. Was that management being more cost-conscious, or was the origination team being more productive?
spk06: I'm going to defer to Glenn on this. Go ahead. That's an origination team productivity, Sammy, for sure, relative to the revenues generated and the cost to acquire them.
spk04: But, you know, Sammy, just to remind you, I typically personally look – we dare ourselves a disservice 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 is our acquisition costs, right? That's why we focus on annualized and placed rent. I mean, you know all these things.
spk03: Yep, absolutely. So my last question really is, You know, 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 400 million dollar guided range, and we are in this economic inflection type time period. Would it, you know, kind of be assumed that team origination productivity continues to increase and capital deployed opportunities also remain very significant and therefore like 3Q22 CapEx deployed or spend? could be pretty significant as well, very comparable to 2Q?
spk04: You know, I think what I want to do is, you know, discuss with Glenn and perhaps we'll think about updating our guidance because I hear what you're asking and we want to, you know, be mindful and respectful to give as much information as we feel comfortable in doing. I'd rather just today say we're highly optimistic that we can find opportunities where we believe We can achieve the returns that we want, you know, 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, you know, this digital revolution 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, you know, i.e., a long-winded way of saying they stand the test of time. So, you know, hopefully that will also allow us to expand both our addressable market of what we can go after as well as, you know, achieving our short-term goals for originating.
spk03: Got it. Thank you.
spk01: Sure. Once again, ladies and gentlemen, to ask a question, please press star 1 on your telephone keypad. Our next question comes from Simon Flannery with Morgan Stanley. Please proceed.
spk00: Great. Thanks a lot. Good morning. You talked about the importance of 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? Does it really bunch up at year end if there's any color there?
spk04: I think in our release we actually broke it up. Glenn, do you have your thoughts? Can you just take assignment? Yes.
spk06: Can you hear me? Yes, that's, that's correct. Um, so Simon, um, there is not really seasonality because you can imagine what were the sides of a portfolio where acquiring assets at various times that have various start and end dates on their in place contracts. We did break out, um, the, the, uh, escalation frequency. And you can see that, uh, almost 75%, 74 is, is annual. I would point out that in Q1 2021, that was 64%. So we're moving to more annual escalators and away from three- and five-year-term escalators based upon how we're acquiring assets.
spk04: Right. In our release, what were the actual breakdowns? Do you just want to let Simon know or you point him to it?
spk06: Yeah. So we've disclosed in our supplement here 75% or 74.5%. or annual. Obviously, we've consistently described it to have no escalators, but we acquired the assets appropriately. Five-year escalators were 18%, and three-year escalators were 5%.
spk04: Appropriately means it's priced in to get us the return we want, of course. Right.
spk00: And obviously, the currency's moved pretty sharply year to date. How are you thinking about things like hedging and any other steps you can take to reduce the volatility around that?
spk04: I don't know if we can reduce, quote, unquote, volatility. I mean, 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. You know, a couple percentage points for any given quarter if a currency goes against us. 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 to 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 of 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, five to ten years, this is not meant to simplify too much. but I guess we use the word muting because that duration sort of tapes, takes 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. That doesn't mean we wouldn't do hedging. You know, we do look at it constantly.
spk00: 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, you know, I think others have talked about a mismatch between seller expectations and buyer willingness to pay. So there's been, you know, 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, you know, what you're seeing in the marketplace and how that's evolved over the last few months?
spk04: 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, you know, ranging from a size, probably a 50,000, a hundred thousand, you know, sort of as an average. And then we do some of the fiber aggregation points. Those can be a lot larger. Uh, and sometimes they come in portfolios where, um, 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, $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 to do many, 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.
spk00: Right. And just one, lastly, um, you know, you've got a, uh, on the SG&A side, how are you managing inflationary pressures there?
spk04: Well, I think, you know, a big part of our SG&A, as you know, is personnel, right? And so, uh, what we want to do is make sure that, uh, when people are really performing and doing a good job, I'm all for, you know, paying them a lot and making sure we keep our team, you know, really well incented. and um you know rolling 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 i probably am speaking too quickly then is there anything i'm missing no no you're not missing anything but bill um that's all appropriate um i would say this right uh simon
spk06: 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 rates, which has been consistent. So, you know, 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.
spk04: And one last thing I'd add, Simon, and you'll laugh when I say this, but because we're putting all that origination SG&A and we view it as part of just the asset price, you know, while we are not permitted to account for and capitalize and probably the way we'd like the IRS, of course, and you heard him say this gives us the right to deduct that. And so every time we look at that party SG&A, it's like a 21 cent deduction because that's our corporate tax rate at the holding company. You know, clearly there are local taxes, which we do have to pay periodically. Great. Thanks a lot. Okay. Thanks, man.
spk01: 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.
spk04: 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.
spk01: Thank you, everyone. You may disconnect your lines at this time and have a great day.
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