05/08/22 03:54 PM EDT

SUNDAY NIGHT REIT READ | 5.8.22 | (RADI)

Rob Simone, CFA

@HedgeyeREITs

Takeaway: Hope everyone enjoyed the weekend!

Happy Mother's Day to all the moms!

Cartoon of the Weekend: Tightening

Ticker: RADI

Subsector: Towers / Infrastructure

Headline: Big news of the week came late on Friday

Not a bad way to end a volatile week! Late on Friday afternoon Bloomberg reported that Best Idea Long Radius Global Infrastructure (RADI) was exploring strategic alternatives, including a potential sale of the company, sending shares up +17.7% on the day. We are running about flat to where we added RADI as a best idea on 1/17, but would remain long here and see additional upside in shares to a logical take-out price (more on that below).
Apparently RADI has already hired a financial advisor and is soliciting interest from potential bidders including private infrastructure firms. We think a take-private transaction makes a ton of sense, as RADI is a "flywheel" type business with very attractive economics but trapped in an inefficient public market "wrapper." I.e. given RADI's size, front-loaded leverage, recent SPAC transaction, etc., the company is not receiving an appropriate cost of capital in the public markets and likely will not for the foreseeable future given its style factors. It would make sense to take the cash-flowing YieldCo + front-loaded on-balance sheet capital + a private non-mark-to-market cost of equity capital to increase the company's scale before re-IPO'ing at a later date or selling to another infrastructure fund, REIT (DBRG?) or publicly-traded private equity fund such as Apollo which is chasing infrastructure investments.
We think it is likely that current CEO Bill Berkman and a significant portion of his team, who have all worked together for several decades, would likely want roll their equity/take an earnout and stay on to further grow the business. We think that would make sense for a private infrastructure investor looking for a "plug and play" option with attractive economics.
Now to the most important part of the story from here: price/value. Thinking through the economics here, given that RADI is buying new lease streams in the ~7% range on an unlevered yield basis and likely trending towards the mid-6% range over time, combined with +3% compounding rent escalators on a constant-FX basis, we believe a private buyer would likely underwrite the YieldCo to a ~6.5% unlevered IRR +/-. Assuming this buyer would also underwrite their own overhead assumption (we use ~3% of NOI) and a +50bps cap rate expansion over a 7-year holding period, this back-solves to a ~4.75% "justified" applied cap rate on forward NOI/GCF (ground cash flow). As a reference point, this equates to 21x in-place annualized rents or 22x GCF.
Under a "going concern" NAV analysis where RADI continues as a public company, the origination platform value + origination overhead burden probably add about a dollar per share of value on net, implying a ~$17/share stock price today for +15.5% upside from here.
However, a private buyer could potentially eliminate a significant portion of RADI's ~$50 million annual origination overhead (think of it as "carry cost" in the public markets), in addition to corporate and public company costs, and replace with its own expense structure to run the platform mentioned above. This accounts for up to roughly ~$4/share of incremental value, implying a $20-$21/share value to a private market buyer (+40% upside from current levels).
We think (1) the Bloomberg story is credible, (2) there is plenty of private infrastructure capital chasing platforms like RADI, and (3) it makes a ton of sense for management to sell the company for the reasons mentioned above. Staying long the stock here.