LAMR - Who's Betting On Billboards?

2023-04-30 07:00:00 ET

Summary

• More recently, I’ve noticed that the billboard REITs are cheap compared to other sectors.
• I thought it would be a good time to take a deeper dive.
• Who's buying billboard REITs?

I recently bought some land in my hometown, and I’m looking to lease a small parcel to a billboard company. I’ve owned billboards in the past as they’ve always been a good supplemental source of income for my development projects .

More recently, I’ve noticed that the billboard REITs are cheap compared to other sectors and I thought it would be a good time to take a deeper dive. As you can see below, billboards trade at an average P/FFO multiple of 8.3x and an average dividend yield of 6.3%.

Keep in mind that advertising has a bad habit of getting cut first during tough economic times – like a recession – so it’s important to consider the potential risks.

In addition, because billboard REITs are essentially in the advertising business, there are erratic capex requirements associated with the challenges to run an ad-based business.

Thus, the billboard business model does not provide the income sustainability warranted by other property sectors (due to the fluctuating ad-based business).

Finally, the underlying assets owned by billboard REITs could be subject to uncontrollable risks (economic, governmental, and competitive) as well as declining revenues, so REIT investors should consider the pros and cons.

Before digging into company-specific research, let’s take a look at performance.

As you can see above, Lamar Outdoor ( LAMR ) has outperformed Outfront Media ( OUT ) and ( VNQ ) year-to-date.

As you can see above, LAMR has drastically outperformed OUT over the last 12 months: LAMR -8.0% and OUT -38%.

LAMR has outperformed OUT over 5 years by a significant margin: LAMR +64.5% vs OUT -9.9%.

With that in mind, let’s take a look at these individual REITs…

Lamar Advertising: Yield is 4.7%

As I wrote in 2014 it had just completed its merger with and into its wholly-owned subsidiary, Lamar Advertising REIT Co . marking the completion of its conversion plan to qualify as a REIT.

The billboard company was actually established in 1902 and is one of the largest outdoor advertising companies in the world, with more than 363,000 displays across the US and Canada. LAMR has the largest network of digital billboards in the US, with over 4,500 displays.

LAMR has substantial insider ownership, members of the Reilly family, including Kevin P. Reilly, Jr., the Company’s Executive Chairman, and Sean Reilly, the Company’s President and CEO, and their affiliates, own in the aggregate approximately 15% of the outstanding common stock.

Their combined holdings represent approximately 62% of the voting power of the shares, which give the Reilly family and their affiliates the power to:

• elect the entire Board of Directors;

• control the management and policies; and

• determine the outcome of any corporate transaction or other matter requiring stockholder approval, including charter amendments, mergers, consolidations, financings, and asset sales.

Here’s where you’ll see LAMR’s billboards:

As you can see below, LAMR’s advertising displays are geographically diversified across the US and Canada. Notably, 2.3% of the displays (based on revenue) are located in New York (987 displays) and 1.1% of the displays (based on revenues) are located in my hometown of Greenville-Spartanburg (1,905 displays). The largest market is Las Vegas, where LAMR generates 2.8% of revenue (2,335 displays).

In terms of the balance sheet, LAMR has seen an improvement in liquidity during 2022 as the company extended its maturity profile and closed on a new $350 million term loan last year to support robust acquisition activity.

The company has a well-laddered debt maturity schedule with no maturities until the revolving credit facility and a term loan in February 2025 and no bond maturities until 2028.

As of the end of Q4-22 and based on debt outstanding, LAMR’s weighted average interest rate was 4.6% with a weighted average debt maturity of 5.3 years. LAMR ended Q4-22 with total leverage of 3.18x net debt to EBITDA, the lowest level ever for the company.

At Q4-22 LAMR had approximately $747 million of liquidity comprised of $53 million of cash on hand and $694 million available under the revolver.

In terms of earnings, LAMR has been a rather consistent performer, averaging 8.1% CAGR from 2015-2022. Notably, AFFO declined by 12% in 2020 and bounced back by 29% in 2021. The company generated 12% AFFO/sh growth in 2022.

LAMR did cut the dividend during 2020, from $3.84 (in 2019) to $2.50 (in 2020); however, the company has clawed back the dividend and currently pays out $1.25 per share, which translates into an annualized payout of $5.00 per share.

As viewed below, analysts are forecasting LAMR’s growth to decline by 4% in 2023 and then bounce back to 9% in 2024.

LAMR shares are now trading at $105.68 per share, with a P/AFFO multiple of 14.5x. The dividend yield is 4.7% and is well-covered by 71%. Shares are soundly valued right now, given the normal valuation of 14.1x (pre-Covid shares traded at 13.6x). No reason to get too excited now, we would recommend waiting on a pullback,

Outfront Media: 7.2% Dividend Yield

OUT was formed via the spin (REIT conversion) of CBS Outdoor Americas Inc. and today owns displays in all of the 25 largest markets in the U.S. and approximately 150 markets in the U.S. and Canada.

OUT’s top markets include sites in and around both Grand Central Station and Times Square in New York, various locations along Sunset Boulevard in Los Angeles, and the Bay Bridge in San Francisco.

As you can see below, OUT’s advertising structures and sites are geographically diversified across 34 states, D.C. and Canada. Notably, OUT has heavy exposure in New York (52% of displays), San Francisco (4% of displays), and DC (9% of displays) – all markets that are struggling, specifically within the office sector:

OUT is junk-rated B+ by S&P and at the end of Q4-22 the company had liquidity of approximately $650 million, including over $40 million of cash, nearly $500 million available via revolver, and $120 million available via accounts receivable securitization facility.

At the end of the quarter, leverage was 5x and the next maturity is not until mid-2025 and less than 25% of total debt subject to floating rates.

As seen below, OUT’s earnings (AFFO per share) have been much more volatile than LAMR, yet CAGR has been higher, averaging 13.7% from the time frame below in yellow. In 2020 AFFO per share fell by 71% and then bounced back by 110% in 2021. Also, 2022 saw solid growth at 37%.

Similar to LAMR, OUT also cut its dividend in 2020, from $1.44 (in 2019) to $.38 (in 2020). OUT’s current annualized dividend is $1.20 per share, which means the company has yet to get back to its pre-covid payout of $1.44 per share.

As viewed below, analysts are forecasting OUT to generate negative (-2.0%) in 2023 and then positive growth (of 12%) in 2024.

OUT shares are now trading at $16.66 with a P/AFFO multiple of 8.7x. The dividend yield is 7.2% with a payout ratio of 63% (lower than LAMR). The normal P/AFFO is 12.3x and the pre-covid range was 11.5x. Assuming shares return to 12.7x, investors could anticipate returns of around 30%...

However, I’m going to error on the side of caution as I’ve modeled OUT to return to a lower pre-covid multiple of 10x, which translates into an annualized total return forecast of 23%.

With such high exposure to NYC, San Francisco, and DC, you are essentially betting on these cities, not so much the billboard business. I would either wait on LAMR’s price to drop or consider OUT a speculative pick, which means invest with moderation in mind.

My Take...

There’s little doubt that Covid has been a disruptor, which has accelerated hopes in sunbelt markets and depressed hopes in certain gateway markets.

Given the very likely recession that we’ll likely be entering in the next few months, I would be careful putting too many eggs (if any) in the billboard basket…

Unless of course you own private real estate, which means you collect rent checks (with no market volatility) and sleep well at night…that’s my plan right now.

Happy SWAN Investing!

Author's note: Brad Thomas is a Wall Street writer, which means he's not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: Written and distributed only to assist in research while providing a forum for second-level thinking.

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