Description

What is RADI ?

• An investment in a secured inflation protected 50 year bond with a ~6-7% coupon on the existing business disguised as an equity trading at 80cents on the dollar due to technical dynamics. In addition, the ability for the company to convert the business development pipeline acts like a 25% out-of-the-money warrant that gains value as the company continues to scale.
• Upside bet (the invisible warrant): ****Platform should compound exponentially vs linear growth, which is what is implied now...

Situation Overview:

RADI is an aggregator of real property interests (ground leases / easements) beneath cell towers and rooftop antennae, as well mission critical telecom assets such as fiber aggregation/switching centers and DAS (the company calls these “adjacent assets”).

Entry Catalyst:

Similar to my post(s) on the MGI board, the entry event to purchase RADI is essentially a liquidity event for another market participant. The PIPE investors who are sitting on large un-realized gains, announced on June 10th a 26mm share registration to liquidate all or a portion of their holdings; ~16mm shares are for sale, which is ~30 days of volume. Over the last few weeks, ~12mm shares have traded including 6mm shares crossed (June 25) on the Russell index rebalance/addition. For the most part, most of the selling has been electronic, and is likely to get cleaned up in the near future as there is demand for the shares. Whether the outloud demand is met with the announced supply or the sellers continue to execute sales via electronic trading is anyone's guess, but likely comes to a conclusion in the near future. When the selling is complete this security that is trading for ~80c on the dollar will likely trade closer to par, and be a solid investment for the long term.

Quick hitter thesis:

1) The market for cell tower ground leases is high fragmented and global - leading to a long duration investment horizon at attractive valuations (~10% cap rates).

2) RADI's scale, specialization, originations team of 300+ strong members, database, foothold in 20 markets across North America, Europe and Latam, and cost of capital provide them with competitive advantages / network effects to source deals faster. The recent push into larger “adjacent asset” deals (such as fiber aggregation points/switching centers, DAS, etc.) is a big positive, as I think this will be a race to achieve scale. The mgmt team is strong as well - a decade of experience working on APW (predecessor of RADI) with successful exits of prior TMT businesses.

3) RADI’s portfolio of ground leases looks like strong defensive growth, especially when compared to towercos. RADI will grow organic SS revenue at 3-4% year (vs towers at 4-5%), but will have better churn (especially with Sprint decom impact to towercos over next 2-3 years), higher margins, zero maintenance capex – all while being structurally senior to tower equity/cash flows. On a total basis (same store + inorganic growth), RADI will grow significantly faster than the towercos, who generally target ~10-12% AFFO/sh growth, whereas we believe RADI will grow FCF/sh upwards of 35%. Not a big fan of relative valuation, however in this eco-system, towerco valuations are meaningfully more expensive than RADI’s in-place valuation on both a cap rate, EBITDA and AFFO basis.

4) On top of this, the valuation feels unchallenging at 23x '21 EBITDA pre-originations SG&A (the metric I use which is basically EBITDA, but strips out the "originations" SG&A which I view more as capex). Using ARR, RADI’s in-place valuation on a cap rate basis is 5.5%, ~200 bps wider than US towercos. At base case (refered to as “base +” to adjust for our new assumptions post Q4 earnings), the growth is very strong, albeit with high capital intensity - ~35% CAGR of FCF / sh through 2025, which results in 23% IRR / 2.2x – these returns are achieved without any multiple compression. The bull case if RADI can accelerate growth (possible given investments in SG&A and opportunities in larger adjacent asset acquisitions) and trade at a premium to today's multiple results is a 38% IRR / 3.3x. This would be a similar story to SAFE, which now trades at a 1.8% cap rate / 170% NAV premium upon executing its growth story.

5) Downside protection from an investor base that likely will force monetization if the business plan can't be proved out quickly (the business burns cash through its originations team), a "discount to NAV" of ~7% after RADI deploys the remaining cash on its balance sheet, and demand from towercos who view ground leases as strategic assets and would acquire RADI's portfolio.

Total Addressable Market Opportunity:

Highly fragmented market + large, global TAM à long tail of roll-up opportunities

a.       Ground leases trade at 10% cap rates (7.5-8% including “origination” or “success based” SG&A). Valuations vary market to market and are likely correlated with tower multiples by region. US is the most mature tower ground lease market and trade 6% range (US tower market is the most expensive in the world as well, where public comps trade in mid/high 20’s EBITDA and private trades have reached as high as 30x)àRADI has been focusing on continental Europe / LatAm to generate higher returns. The company factors this into their u/w, solving for risk adjusted returns by incorporating a country’s risk premium relative to the US. ~10% cap rates feel highly attractive given 1) senior position in capital stack 2) relative valuation of towers, which trade in high 20x in the US, mid-high 20x EBITDA in Europe, and mid teens x EBITDA in LatAm.

b.       Approach:

                                                              i.      1) Unsophisticated land owners – when towers were initially constructed decades ago by telcos, they typically separated the fee simple / leasehold interests. As a result, the land under most towers are owned by one off land owners (farmers, schools, etc.) who lack institutional knowledge. AMT quotes: “90% of ground leases are held by landlords who own a single site.” These land owners likely see the tower income as an annuity on a piece of land (non-mission critical) without much intrinsic value w/o the tower’s cash flow – and are likely to part with the asset for a buyout when in need of cash, estate planning, etc. RADI has said most of the time, when land owners are contacted by their originations team, it is the first time the have ever been contacted to monetize the asset.

                                                             ii.      2) Ability to leverage and manage risk across an aggregated portfolio of leases versus a single asset

c.       Large TAM

                                                               i.      RADI (holdco is APWireless) has penetrated between 0.3% and 0.7% of geographic regions of Europe, North America, South America. In its current 19 markets, penetration is 0.5%. While the denominator is likely over-selling the potential of “actionable” sites (i.e. sites held by independent towercos are likely not for sale), even if cut in half this is a meaningfully unpenetrated market. Additionally, due to carrier demands for densification due to 1) current data trends and 2) 5G, more macro towers/rooftops are likely necessary in the future and should expand the TAM. RADI will also likely enter new markets, as they have continually done.

                                                             ii.      As mentioned before (quote by AMT), this market is also highly fragmented, mostly owned by individual owners

                                                           iii.      RADI has mentioned it would like to expand into other digital infrastructure products, this is not u/w – but could be upside optionality

d.       Competition exists from other smaller PE. Primary competitors are the towercos – who see ground leases as a major risk to their business models (the majority of tower assets sit on ground leases). Competition is likely to increase both with more towercos in Europe and dry powder of infrastructure funds. Management has said they are not worried due to high fragmentation, number of markets, and low penetration

Management:

Management team has a long tenure at Radius. Team is aligned with shareholders through ~6.8mm LTIP shares outstanding that can be achieved through both time and performance hurdles.

                                                               i.      We had the opportunity to meet with management directly, included Bill Berkman (CEO), as well as the President and CFO. We view the team more favorably after having spent several hours together. There are 4 executives at RADI who have spent the last 30 years together building and monetizing telecom businesses.

                                                             ii.      CEO / Co-Chairman is Bill Berkman, who has a long history in wireless telecom. He has founded multiple telecom companies, with >$1B exits. Berman served on the BoD for IAC / Liberty Satellite & Technology, Teligent (sold to Liberty), and Empire State Realty.  Bill Berkman is especially impressive – having a deep understanding of tower and other telecom related businesses and being very approachable/open to investor feedback.

                                                           iii.      Importantly, Berkman’s history of founding, quickly scaling and selling new businesses should be looked upon favorably in terms of exit potential in the event growth trajectory changes or opportunity to create value faster happens

Risks worthy of monitoring:

• Ability to scale: don't envision this to be an issue for the next few years
• Credit deterioration of tenant (87% of rent is IG rated tenants)
• Optically high entry valuation
• 'Activist' investors seek immediate gratification and force a premature sale at the slightest hiccup in growth
• Interest rates are a risk, but keep in mind there are CPI rent escalators in place for ~75% of sites
• European communication consolidation could lead to site de-commissioning
• Geographic risk / Currency fluctuations
• ECC ruling in UK (20%)
• Unanticipated churn
• Paying higher multiples that leads to lower net IRRs

Catalyst

Short-term (entry) catalyst(s): PIPE selling is completed; sell-side coverage initiation

Intermediate catalyst(s): continued roll-up of assets; capital markets flywheel

Longer duration path: Over the next several years, RADI will effectuate $1bn in transactions utilizing a low cost of capital at attractive cap rates and will likely grow equity value multiples from current trading levels. 

**Platform should compound exponentially vs linear growth