Billboard REITs: We're Paying Attention (Lamar Vs. Outfront)

1 year ago

beritaja.com

Times Square postulation by night, New York City

REIT Rankings: Billboards

This is an abridged type of nan afloat report and rankings published connected Hoya Capital Income Builder Marketplace connected February 14th.

From nan agleam lights of Times Square to nan iconic signage on LA's Sunset Strip, advertizing advertisements person go a awesome of American consumerism and an inescapable fixture of nan emblematic American commute. In nan Hoya Capital Billboard REIT Index, we way nan 2 advertisement REITs, which together ain astir half of U.S. advertisements and relationship for astir $15 cardinal successful marketplace value: Lamar Advertising (NASDAQ:LAMR) and Outfront Media (NYSE:OUT). We besides way non-REIT Clear Channel Outdoor (CCO), which is nan third-largest advertisement operator. Still very overmuch a niche sector, Billboard REITs comprise astir 1% of nan broad-based commercialized Real Estate ETF (VNQ).

Billboard REITs - an often overlooked niche conception of nan existent property manufacture - ain a ascendant stock of nan advertizing signage crossed nan United States, controlling much than half of nan nation's 500,000 outdoor advertisement displays - a amazingly resilient business that has seen revenues and profitability afloat retrieve to pre-pandemic levels by mid-2022 aft an abrupt diminution early successful nan pandemic. One of nan newer REIT sectors, Outfront was nan first advertisement REIT, emerging successful 2014 from a spin-off from CBS Outdoor, and converting to a REIT soon thereafter. Lamar went nationalist successful 1996 and operated arsenic a accepted c-corp earlier it announced a conversion to a REIT later successful 2014. Clear Channel remains a non-REIT corp but has explored a REIT conversion astatine various points successful nan past half-decade and notably, began providing REIT-specific metrics (including AFFO) successful its astir caller quarterly report.

These Billboard REITs deduce astir 75% of their revenues from accepted large-format advertisements pinch nan equilibrium done transit advertizing and different advertizing signage. Lamar operates arsenic nan astir "pure-play" advertisement institution of nan 3 - deriving complete 90% of its revenues from signage on U.S. highways and interstates - while Outfront has a ample transit-oriented business, underscored by nan company's monolithic transit woody pinch nan New York Metropolitan Transportation Authority. While nan 2 REITs run almost exclusively successful nan United States, Clear Channel has a important world beingness pinch astir 40% of its revenues coming from European and Asian markets. Local businesses relationship for astir two-thirds of advertisement advertisement spending - and upwards of 80% connected accepted large-format road advertisements - while nationalist brands relationship for 30% of manufacture revenues - but comprise nan mostly of spending connected integer displays and transit advertising.

Barriers to introduction are important arsenic signage remains 1 of nan astir highly regulated industries making love backmost to a 1965 rule that constricted caller advertisements on national highways. We for illustration nan clear proviso constraints of OOH existent property arsenic nan mostly of existing advertisements are grandfathered-in arsenic "legal non-conforming" uses, and we spot nan gradual conversion to integer displays – which are getting some cheaper and higher show value - arsenic a catalyst to thrust mid-single-digit same-store gross maturation and separator description passim nan decade. Sharing akin characteristics to nan compartment building REIT manufacture (and successful fact, galore advertisements big cellular equipment), advertisement REITs ain nan show building and nan use-permit but not nan onshore underneath, leasing it from thousands of individual landowners for position of 5-15 years.

Unlike different media, there's "only 1 channel" connected nan highway. In nan era of highly personalized advertising, precocious tracking, and ad-conversion metrics, OOH remains an charismatic and cost-effective mean for mass-market and section advertisers arsenic ads can't beryllium skipped, blocked, fast-forwarded, aliases consumed by "bots." Spending connected OOH advertizing remains a small, but steadily increasing conception of nan advertizing landscape. A study from PwC showed that spending connected OOH is expected to afloat retrieve by nan extremity of 2022 and will person grown astatine a astir 3% yearly complaint betwixt 2019 and 2026, nan third-strongest complaint of maturation down net advertising. Notably, nan PwC study projects that OOH spending is group to overtake magazines and newspapers arsenic nan fourth-largest advertizing transmission by 2024.

Advertising contracts connected OOH displays typically tally for 1-12 months and pricing is based connected nan billboard's size, viewability, and impressions. Somewhat ironically, galore of nan heaviest users of OOH advertizing are exertion companies including Apple (AAPL), Amazon (AMZN), AT&T (T), Netflix (NFLX), and Facebook (FB). As it relates to full OOH spending, nan apical 10 merchandise categories see section services, retail, master services, politics, and fast-food restaurants for illustration McDonald's (MCD). Ad spending is 1 of nan first statement items that businesses trim erstwhile times get tough, truthful naturally, Billboard REITs are 1 of nan astir economically delicate REIT sectors, an property that has was connected afloat show during nan pandemic.

On a "cost-per-impression" aliases CPM basis, OOH advertizing consistently ranks arsenic nan cheapest advertizing mean and is particularly effective for nationalist mass-market brands and for section services (restaurants, state stations) successful nan contiguous proximity. These 3 companies harvester to power much than half of each advertisements and transit displays successful nan United States, but nan remaining 3rd is rather fragmented pinch thousands of individual landowners and permit-holders. These REITs are successful nan process of converting galore of nan highest-value locations from fixed advertisements into integer show boards, which tin bring successful 2-4 times much gross than emblematic fixed show boards because of their move messaging and pricing capabilities and typically require importantly little ongoing labour disbursal compared to fixed signage.

While nan conversion to integer is helping to amended its separator profile, advertisement ownership is still a comparatively operationally-intensive business that requires a ample advertizing salesforce and continual attraction successful nan shape of posting and maintaining fixed signage. Operating margins are beneath 30% compared to nan 65-70% REIT assemblage mean and, arsenic seen connected afloat show during nan pandemic, these businesses run pinch a precocious grade of operating leverage owed to nan semipermanent quality of their crushed lease liabilities and nan short-term quality of their advertizing contracts.

Hoya Capital

Capital expenditure needs, however, are comparatively debased astatine astir 5% of revenues. The modulation to integer should thief to amended long-run operating margins but will consequence successful elevated cap-ex arsenic displays will request to beryllium updated periodically pinch newer show exertion to execute nan highest imaginable revenue. Access to superior - and costs of superior - will beryllium particularly important arsenic these REITs put successful nan integer transition. Lamar's equilibrium expanse - pinch a indebtedness ratio that is beneath nan REIT assemblage mean - is successful healthier style than that of Outfront's, but OUT's indebtedness load is much manageable than nan metrics propose connected nan aboveground pinch a comparatively well-laddered maturity floor plan and, notably, a akin percent of variable-rate indebtedness arsenic LAMR.

Billboard REIT Fundamentals

The deficiency of a commute for galore Americans early successful nan pandemic slammed these REITs successful 2020 arsenic acold less eyeballs were looking astatine Out-of-Home advertizing displays. The wide transit conception of nan OOH marketplace was deed peculiarly difficult amid a plunge successful ridership, and while nan accepted advertisement conception has now seen a more-than-full betterment to pre-pandemic levels pinch spending levels now 15% supra 2019-levels, transit spending remains astir 30% beneath pre-pandemic levels. Spending from section advertisers bottomed astatine astir 30% beneath pre-pandemic levels successful 2020 but has now fully-recovered to 2.3% supra 2019-levels. National brands pulled backmost much importantly astatine nan depths of nan pandemic pinch spending levels that were 50% beneath 2019 levels successful 2020, but person since pulled-even pinch pre-pandemic spending.

As discussed successful our REIT Earnings Recap, Lamar Advertising (LAMR) remains further up successful its post-pandemic betterment owed to its much billboard-heavy portfolio. In its latest report, LAMR noted that it's "tracking to nan apical of our guidance range" which would raise its full-year FFO to levels that are 25% supra 2019-levels. LAMR cited beardown governmental advertisement spending arsenic a cardinal driver of gross maturation successful Q3 and into early Q4, contributing 210 ground points of nan full income maturation of 7.6% successful October. LAMR did statement comparative weakness successful request from nationalist brands pinch its national/programmatic conception increasing conscionable 0.3% successful Q3 while its section business grew 6.4%. Outfront (OUT) - which has been burdened by its much transit-heavy portfolio - besides reiterated its full-year FFO outlook which would bring its AFFO to wrong 4% of 2019-levels.

Data earlier this period from nan Out of Home Advertising Association of America (OAAA) showed that OOH advertizing revenues successful Q3 2022 grew by 11% year-over-year (y-o-y), pinch revenues reaching $1.94 cardinal and for 2022 year-to-date, OOH spending is comparable pinch nan humanities YTD precocious group successful 2019 astatine $6.4 billion. OAAA’s information besides showed that integer OOH spending continues to outpace nan accepted fixed format arsenic Q3 integer spending roseate by 14% year-over-year. Notably, 79 of nan apical 100 OOH advertisers accrued their spending successful Q3 while 32 of nan apical 100 much than doubled their spending according to nan OAAA report. Of note, spending successful nan Media & Advertising conception grew 32% - driven by streaming and net services - while spending from Hotels and Resorts grew 26%. Political spending roseate to a quarterly grounds precocious of $134 cardinal up of nan midterm elections.

Billboard REIT Stock Performance

Billboard REITs were slammed harder than immoderate different spot assemblage too hotels during nan depths of nan pandemic, plunging much than 65% from highest to trough successful March 2020, but ended 2020 pinch alternatively humble declines of conscionable 12% connected mean and person been among nan better-performing spot sectors since nan commencement of 2021. The Hoya Capital Billboard REIT Index - a marketplace cap-weighted scale - outperformed nan broader REIT scale successful 2021 pinch returns of astir 50% and outperformed again successful 2022, posting more-muted declines of 20% compared to nan -25% diminution from nan Vanguard Real Estate ETF (VNQ) and astir matching nan declines from nan S&P 500 ETF (SPY).

Lamar's comparatively blimpish equilibrium expanse and much pure-play attraction connected nan higher-margin accepted advertisement business has been rewarded by investors complete nan past 5 years, delivering mean yearly full returns of 14.7%, good supra nan REIT mean of 6.7% during that time, and certainly, good supra its adjacent Outfront, who's outsized vulnerability to transit advertizing has resulted successful comparable yearly returns of only 3.0% during that period. Both REITs person importantly outperformed Clear Channel complete astir caller measurement periods, which has been burdened by a precocious indebtedness load and a akin transit-heavy portfolio operation arsenic Outfront.

Billboard REIT Dividend Yield

Before nan pandemic, advertisement REITs were among nan highest-yielding REIT sectors but were concisely successful nan basement of nan REIT assemblage aft Lamar trim its dividend by 50% and Outfront slashed its dividend wholly successful 2020. Lamar's beardown operating capacity complete nan past twelvemonth has enabled it to reconstruct its dividend backmost above pre-pandemic levels, but Outfront's dividend remains astir 10% beneath its pre-pandemic level. On average, advertisement REITs salary an mean dividend output of 4.9%, good supra nan REIT assemblage mean of 3.6%.

Lamar indicated successful its third-quarter net telephone that it expects to raise its quarterly payout again this twelvemonth to a $1.25/share rate, which would beryllium 30% supra its 2019 payout complaint of $$0.96/share. LAMR besides paid a $0.30/share typical dividend connected apical of its regular quarterly dividend successful December. After hiking its dividend successful early 2022 to $0.30/share, Outfront has held dependable astatine this level, amounting to a dividend output of 6.16%. Given nan comparatively debased payout ratio of 60%, we judge that OUT is apt to afloat reconstruct its dividend to pre-pandemic levels for its 2023 payouts.

Key Takeaways: We're Paying Attention

Sharing akin characteristics to nan compartment building REIT manufacture - a supply-constrained assemblage that is dominated by a mini fistful of plus owners - we judge that a high-single-digit yearly FFO maturation tally complaint is achievable complete nan adjacent half-decade - absent immoderate further pandemic-like hiccups - driven by 3-5% same-store gross growth, a 1-2% publication from separator betterment driven by integer conversions, and a 1-2% publication from accretive acquisitions - a maturation floor plan that is particularly compelling for REITs trading pinch 4.5%-6% dividend yields and pinch a alternatively unsocial finance characteristics arsenic 1 of nan least-sensitive REIT sectors to liking complaint activity and nan single-best assemblage successful our Inflation Hedge Factor metric. We still spot immoderate upside near successful Lamar, but now spot much important imaginable successful Outfront, which trades astatine single-digit Price-to-FFO multiples while paying a hearty and well-covered dividend pinch a output of complete 6%.

For an in-depth study of each existent property sectors, cheque retired each of our quarterly reports: Apartments, Homebuilders, Manufactured Housing, Student Housing, Single-Family Rentals, Cell Towers, Casinos, Industrial, Data Center, Malls, Healthcare, Net Lease, Shopping Centers, Hotels, Billboards, Office, Farmland, Storage, Timber, Mortgage, and Cannabis.

Disclosure: Hoya Capital Real Estate advises 2 Exchange-Traded Funds listed connected nan NYSE. In summation to immoderate agelong positions listed below, Hoya Capital is agelong each components successful nan Hoya Capital Housing 100 Index and successful nan Hoya Capital High Dividend Yield Index. Index definitions and a complete database of holdings are disposable connected our website.

Read The Full Report connected Hoya Capital Income Builder

Income Builder is nan premier income-focused investing work connected Seeking Alpha. Our attraction is on income-producing asset classes that connection nan opportunity for sustainable portfolio income, diversification, and inflation hedging. Get started pinch a Free Two-Week Trial and return a look astatine our top ideas across our exclusive income-focused portfolios.

Income Builder

With a attraction connected REITs, ETFs, Preferreds, and 'Dividend Champions' crossed plus classes, members summation complete entree to our investigation and our suite of trackers and portfolios targeting premium dividend yields up to 10%.