2023-10-08 11:55:36 ET
Summary
- OUTFRONT Media has experienced a significant drop since our last coverage.
- This has pushed the yield up to 14% and the stock is trading near 5X forward AFFO.
- The dividend actually looks safe based on AFFO coverage but there are things to consider here before buying.
On our first venture into looking at OUTFRONT Media Inc. ( OUT ), we ironically decided to stay out. While there was the appeal of diversification, (OUT does have a very unique business model) and the chance to participate in advertising recovery, we were not convinced.
The 7.87% dividend yield just does not do it for us. Sometimes the stock does not make sense but bonds do. The longer-dated bonds yielding 7.59% to maturity are certainly a safer option. But we are getting investment grade bonds yielding that much today in select cases, and we really don't see the need to reach deep into junk territory for that kind of yield. We won't be buying that, either. We will be keeping an eye on Lamar Advertising Company ( LAMR ) though for a potential entry point down the line.
Source: Lamar Actually Looks Better Despite A Higher Multiple
REITs have been in for a spectacular butchering since that article was released, with ( VNQ ) down 13.64%. LAMR did worse than that at negative 18.22%. But OUT led the way into the abyss with a 43.95% drop.
We look at where things stand on this unique REIT.
Q2-2023
OUT dropped almost 28% within 3 weeks of the Q2-2023 results, and the bulk of its underperformance came during that timeframe. So what happened there? Total revenues were fine and increased by 4.1%.
Sure, this was painted as a miss of a $3.8 million by there aren't that many analysts covering this, and the miss was still less than 1%. The area that OUT has focused on, the digital revenues side (those electronic billboard signs), increased by 31.8% year over year.
These have been hailed as the future for OUT as they represent a higher margin story for the company. So there was nothing wrong with those numbers either. What might be the issue here was the change in expense levels. Overall expenses were up 6.7% with billboard leasing up 14%. Corporate expenses were up 7.7%, though that was a small base and did not move the needle materially.
This gets to the key point here that while OUT is structured as a REIT, it itself leases and pays for billboard space in many cases. The main reason to own REITs is to be relatively indifferent on the expense side, as most REITs pass on most costs to tenants. Sure, the triple-nets are the ones you commonly hear about, which pass on almost everything to tenants. But even outside that niche space, REIT margins are generally steady and secure. That is, until you run into one like this.
When you take all that out of OUT, you get a 2.5% drop in OIBDA (operating income before depreciation and amortization).
This is still before we get to the really bad part. Adjusted funds from operations (AFFO) dropped 16.3% with interest expenses eating OUT's lunch and some might argue, even dinner.
The Culprit?
If OUT had to single one culprit for the poor performance, it would be the MTA contracts, which are not reflective of the lower ridership levels.
Clearly, the COVID-19 pandemic massively disrupted how people work and commute, adversely impacting transit ridership and in turn, our ability to generate advertising revenue on these assets. The ongoing lower ridership level, coupled with new urban trends and some adverse public perception of the transit environment in major cities was certainly not what anyone expected, when we entered into these contracts. And while we still absolutely believe our transit business will continue to recover, the pace of recovery has stalled in 2023.
I will also mention that given the current challenges posed by MTA contracts in particular, we are currently engaged in conversations with the MTA and are hoping to find a mutually agreeable approach to address the significant changes in the New York City transit environment since the signing of the agreement in 2017.
We will update you on this in the coming months. In any event, we considered it advisable, prudent, and timely to update the value of our investment in these transit franchises leading to today’s non-cash charge.
I would additionally mention this period of transit weakness further impacted by changes to the fall television schedules caused by the writers and actors strike will present us from achieving our previously issued AFFO guidance for 2023. Again, Matt will provide more detail on our revised expectations later on the call.
Source: Q2-2023 Conference Call
While that is their view, we saw the margin weakness as more broad based and transit issues being a modest contributing factor. Readers can decide where they land based on the slides above.
Outlook
We know investors sometimes associate high yield with one that is about to be cut right away. But here, the buffer still looks pretty good on the dividend. AFFO, which certainly goes through meatgrinder of adjustments, came in at near $270 million for the last 12 months.
It is still way ahead of what is required to pay $1.20 a share on 165 million shares.
Technically, this looks covered. Both 2024 and 2025 estimates (About $1.80) comfortably cover the dividend as well. But there are a couple of issues with saying we will be all right. The first one is that we are seeing leverage rise steadily. Debt to EBITDA was at 4.9X one year back.
Current readings are at 5.3X.
The firm has no immediate maturities that press it to sacrifice the dividend so that too works for it. But the leverage ratio is unwieldly in our opinion for a company that has so many features that we see in non-REITs. An extension of that thinking is that there are triple-net REITs today like Essential Properties Realty Trust, Inc. ( EPRT ) that have a model far more stable than OUT, and then are running leverage ratios of 4.3X . So you have to be a real bull on the billboard business to buy this here.
Verdict
Arguably, this is not the worst time to speculate on OUT. The AFFO multiple is one of the lowest we have seen outside the COVID-19 crash.
So if you are looking for the courage to put a "Sell" rating this deep into the distress, you won't find it with us. As we explored above, even the dividend likely is safe for the foreseeable future. We are still not buyers here, as we don't want our REITs with an extra dose of ghost pepper. The cyclicality and the rapid changes in expense levels are not attractive in a REIT model, regardless of the 14% yield. The longer dated bonds might be a viable alternative here for those bullish on the company, though many bonds are harder to trade as they SEC 144As.
We continue to remain out while noting the potential for sizeable rebound from extremely oversold conditions.
Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints.
For further details see:
A Look At The 14% Yield From Outfront Media