RADI - A Joe's Pros Interview

On February 14th, 2022, we interviewed a Radius Global (RADI) investor who believes the company has a safe and growing rental stream through its existing portfolio of cell site leases. As the demand for telecommunications infrastructure grows, RADI can leverage its first-mover advantage, technical expertise, and strong management team to continue expanding the portfolio by winning a large share of the massive number of acquirable leases. He estimates that the company creates 50 cents of value for every dollar spent, creating a multi-bagger opportunity if RADI spends aggressively over the next 3 - 5 years. 

The following is a lightly edited version of our conversation.

Joe

Good afternoon, it's Joe DeMatteo on February 14th, 2022, and welcome to the Joe's Pros Interview. I understand you’d like to discuss Radius Global Infrastructure. Thanks for joining me. 

Pro

Sure, thank you. Radius Global is a fairly small cap company. There’s about 82 million shares, about $800 million of net debt, so just about a $2 billion enterprise value. The company came public through a SPAC. It was a foreign SPAC and then they domesticated last year and they became a domestic company. They've been working in this area for about 10 years, and basically what they do is buy rental streams underneath cell towers. In many cases, they buy triple net ground leases. Just for explanation purposes, all their leases are triple net, which means you don't pay any taxes. You just collect your rent and there's no cap ex, so your rent is free cash flow just like if somebody was sending you a check. So, that's what they do. They buy land underneath cell towers, but they're more focused on buying easements and rooftops from building owners. This is where it gets really interesting because you've got an army of about 300 people that are calling on landlords, 90 percent of which are mom and pops where they own one or two buildings, and it goes something like this: One of these guys calls on the landlord and says, “We'd like to come down and talk to you about renting some space in your building. It won't impinge on anything you're doing, and it's for the purpose of wireless communication.” The landlords, in the vast majority of cases, sort of give them a “not interested” at first, but then over time, they realize it's a very easy way to tap into a nice check. The leases are very long term in nature. The shortest are those in Latin America, which are about 30 years, and the ones in Europe and North America are more like 60-70 years. The company is in about 20 countries. They have a greater concentration in Europe and North America, but they also have some operations in Latin America. 

One of the things that's very interesting about it, I think, and this is different from tower companies, is that 80 percent of their rents are tied to the CPI. So, on average, over time, if inflation runs over 2.5 percent, which is what most of the tower leases escalate by, they stand to see good growth in that. They have 7,000 leases in 6,000 buildings. In some cases, there's more than one. It's a total of almost 1 million square feet of space, and for perspective, and this is interesting, most of them are at least 50 percent empty. They'll buy 1,000 square feet in a building and they'll put up a tower or there might be a tower there, which is maybe 400-450 square feet. So they still have half of the roof, typically, and as the world changes with things like 5G and whatnot, there are new opportunities to put things in that space. 

On the management of the company, it's led by Bill Berkman, Scott Bruce and Richard Goldstein, who have a very, very successful history in the wireless space. They had a public company that they sold out to Liberty Media. For about 10 years, they did private deals where John Malone was the lead investor. And about 10 years ago, they started building this business, obviously on a much smaller scale, and now they took it public. 

It's growing very, very fast. In 2014, the company had $17 million in revenue, and it's basically just been a stair step from there to about $117 million currently. All the metrics have been growing at pretty rapid rates, and in the past three or four years it's actually accelerated as they've gotten access to new pools of capital. So the last three or four years are close to 50 or 60 percent growth. 

It's really an arbitrage business because what they're doing is they're going in and they're buying most of this stuff at pretty close to a 7 percent cap rate, which is a big number. If you look at the value of highly secure rental streams, and you could argue that this is just as secure as a land lease, the multiples are typically very, very high. So, as I said, in a sense, it's like an arbitrage. Also, they're buying them at 7 percent going in, and there's a lot of opportunities to add tenants. As demand for towers and other types of telecommunications infrastructure grows, 5G is going to create a lot of demand for stuff, and these guys will be well positioned to try to garner additional rent streams.

Joe

Just so I understand it, if they go in and negotiate with a landlord for a building and then they get 1,000 square feet, for example, if they have further use, do they negotiate for potential future use of that space? Or do they have to go back each time when they want to add something, if they need to add 5G after the initial equipment is in place? 

Pro

If there's an existing tower, they buy out the landlord and they become the new landlord for the tower. 

Joe

That's on a tower. I'm asking about if they go into a building.

Pro

They don't need to do anything to add incremental telecommunications infrastructure. 

Joe

Thanks. I see the company has a fairly extensive website explaining what they do, discussing their footprint, et cetera. Why don't you go through your variant perception on the company.

Pro

Sure. I have to tell you, this is really not a variant perception idea for me because I've heard the story spoon-fed from management and I just buy into it. 

Joe

Can you explain why you think this could be a multiple bagger over the next few years? I know you have a long history with Bill Berkman, so my question is why is this going to be a superior investment? 

Pro

Well, I think it's exciting because I think it's an enormous untapped industry. They are far and away the biggest, and they've got 6,000 buildings under contract. The universe of buildings, according to them, that's addressable– and they may be exaggerating– they're saying there's 1 million buildings. So, it's just an enormous wide open area that is begging for capital because if you think about it, for the landlord, it's fabulous because in many cases it's a completely incremental revenue stream, so they come out ahead. Carriers, basically, I want to say that they don't care. They just want to pay market rent. Having said that, the carriers would rather rent from a mom and pop than rent from these guys because the special sauce that they have is a phenomenal understanding of radio frequency and propagation and how to analyze the topography of the geographic area and pick the spots that are going to be desirable for cell sites, taking into account a huge number of variables that we don't really think about. But it's everything from weather, current buildings nearby, proposed buildings, trees, on and on and on. 

Joe

You describe a technical expertise that should give the company a decided edge. On that score, 5G, I believe, is going to create a lot more sites due to the way that it is distributed. Is that what's creating these millions of buildings the company talks about as potential sites? 

Pro

When I see 1 million buildings, I'm just talking about, you know, go out on the street, across the country, and across the market areas. Nothing's been created. 

Joe

I understand the building side. My question is, is this trend being propagated by technological change such that there needs to be more sites distributed out as opposed to a single cell tower when this industry started?

Pro

Absolutely. The history of cellular carriers and cell towers is just a one way, more and more and more trend. The population of cell towers has historically just grown year in, year out at a modest rate. There's already a lot of densification going on with things like small cells because the wireless carriers need stronger signals. So, there's two things. They need more sites and there's also a lot of other equipment that comes with this stuff that needs a place to sit, and they’d be an ideal landlord for that, whether it's a generator or an edge side. Clearly, 5G and the growth in wireless is a big wind in the back of this whole area and the whole area has gotten hot. Everyone's going to hear a lot more about it in the weeks ahead. Venture capital is very interested, but they (RADI) are clearly the biggest and they are clearly the first mover. Again, 6,000 buildings, they have about 7,000 leases, they've got about 1 million square feet of space. They buy these sites, and again, they're buying them at close to a 7 percent cap rate going in. And if they can add tenants or sites or towers, that 7 percent just goes up. So, it's far more attractive than going around trying to buy good buildings or ground leases from an economic standpoint. The returns are dramatically higher. 

Joe

I think you covered a lot of the attractive characteristics. It looks like they're anticipating revenue of $105 million in the year that ended 12/31/2021, up from $70 million last year and going to $143 million in 2022. 

Pro

Yeah, and really the best way to look at this company is like two companies. On the one hand, you've got what I've been thinking is about a $110 million lease stream, and that is all free cash flow. If it were a standalone asset, I think it would easily be worth a couple of billion dollars because 20x rent is by no means expensive. In fact, it's a lot cheaper than almost any public REIT or tower company, for that matter. In this case, that's going to get you call it $2.2 billion. There’s $800 million in net debt, which leaves you like $1.3 billion - $1.4 billion, which is probably $16 - $17. That's today. 

What's so exciting to me is if these guys can continue to have good access to capital, which they have had. If you think of what I just called out as one business, those rent streams, the second business is the 300 guys who are calling on the businesses. They're like the origination engine. For example, they'll put to work about $450 million this year– they'll put about $450 million in landlords’ pockets this year– and they'll probably pick up a $35 million rent stream for that. So, you have the dynamic of the existing pile of rents growing at whatever rate it grows. It’s a modest rate but it's faster than towers. Plus, you have the value creation that's going on by this origination engine. I would argue that for every dollar they spend, I think they're creating 50 cents of value, at least. So my hope is over the next 3 - 5 years, they spend a couple of billion dollars. If they do that and you pencil it out, you get to some very big numbers for the equity. 

Joe

Appreciate that. Perhaps you can spend another few minutes on the rationale for “separating” the two businesses, aside from the fact that you said there's ExistingCo, which has these long leases, and they're already in place. And then they have this group of employees that go out and try to get new business to layer into that. I'm just not sure why you separate the two. 

Pro

I just kind of want to look at it like that. If you look at the consolidated P&L, you're not going to get a clear picture because it's all blended. Financially, they're very distinct assets. This is how the company tells me they look at it and I think it makes sense, frankly. I ask myself what my risk is here, and my risk is they have no more access to capital, interest rates go to 14 percent, and I've got this existing 6,000 buildings under that scenario, which would probably be fine because they'd get these rapid rent increases because of the escalations. I assume if interest rates are at 14 percent, inflation would be up a lot. But those assets give me comfort that it's worth at least where it's trading. The origination is really the upside. As I said, this year they spent about $450 million dollars and I think their aspirations over the next 3 - 5 years are multiple billions of dollars. When you pencil out what happens to the existing rent and what that would likely be worth, and what's likely to happen to the liability side of the balance sheet in terms of the net debt, I think they're creating a very significant amount of value. My flippant comment is every time they spend a dollar, they create 50 cents a value. For 90 plus percent of these buildings, the owner owns one building, so this gives RADI an edge in negotiations. 

Joe

Right. This sounds like one that we'll watch grow for a while, and perhaps I'll check back in with you in a year and then chart the progress and see what you think about it. 

Pro

Sure. 

Joe

OK, well, I want to thank you for your time. Any other points that I missed? 

Pro

No, I think we covered the highlights. Once you understand what they're doing, and again, I call it arbitrage, and if you look at it– I don't know if it's the right way, the wrong way– but you've got this AAA stream of rents that are being paid by the three large wireless carriers, and if any of them went bankrupt it almost 100 percent wouldn't disturb the rental stream. That’s because even in bankruptcy, if you want your system to work, you need a tower, and if you need a tower, you need a place to put it. So, I think they're very, very secure leases, more so than what the tower companies have. 

Joe

That makes sense that you're covering your downside. All right, very good. Thank you for your time and good luck with the investment. 

Pro

Thanks, bye.