An Undiscovered High-Yield REIT

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Apr 24, 2015

In February, Lamar Advertising (LAMR) declared a quarterly dividend of $0.68/share. The board expects a total 2015 annual distribution of $2.75/share, a 10% increase from the prior annual dividend of $2.50. After a conversion to a REIT structure, shares are now yielding >5%. Is now the time for investors to get interested?

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The business

Lamar Advertising sells advertising on billboards, buses, shelters, benches and logo plates in the U.S., Canada and Puerto Rico. The company owns and operates approximately 145,000 billboards (including 1,880 digital billboards), 120,000 logo-advertising displays and 38,000 transit-advertising displays. While simple, this profit-generating business has been around for over a century.

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Shift to a REIT boosts dividend payout

Upon its conversion to a REIT, Lamar is now required to pay out at least 90% of its income to shareholders. Lamar completed the conversion earlier this year, causing its dividend payout to rise in accordance to REIT structure rules.

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Competitive advantages

Lamar is the largest pure-play outdoor operator with a national footprint and over 145,000 billboard displays. It also sports a diversified base of 40,000+ tenants, with no one customer accounting for more than 1% of sales.

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Significant barriers to entry exist due to permitting restrictions which make Lamar’s real estate portfolio nearly impossible to replicate. Federal, state and local regulations help Lamar maintain leading share within its markets. Rules govern where and how billboards may be built (i.e. typically cannot build new billboard within a certain distance of existing structures) and many existing structures have been grandfathered in and cannot be rebuilt by another operator without obtaining zoning variance.

These barriers have created a consolidated industry with only a few major players. Lamar controls ~18% of the U.S. market – second behind CBS Outdoor. Still, Lamar is the dominant market share leader in its geographies of operation.

Even in a consolidated market however, there is ample room left to expand and acquire smaller competitors to fuel growth.

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Additionally, the shift to digital also provides for growth opportunities as the costs involved are much lower and the company can service multiple clients through a single location. Already, 15% of revenues come from digital sources.

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Management

Lamar’s management team is one of the most tenured you will find considering the stability of the business.

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Ownership

After the shift in operating structure to a REIT, institutional ownership reset much lower until REIT funds start to get more heavily involved. Peter Lynch prefers to buy companies with low institutional ownership as it allows more opportunities for mispricings.

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A big concern is insider ownership. Lamar has a dual share class structure, with the B shares having 10 votes per share on corporate matters. The Reilly Family (founders of Lamar) controls over 60% of the votes while owning just 17% of the equity (source: proxy statement). There were also multiple sales following the REIT conversion.

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Valuation

The average yield of a U.S. REIT today is ~4%, about 20% less than LAMR’s current yield. As REIT funds start to get interested, the valuation may rise given the lack of high-yield, stable REIT’s available in today’s low-interest rate market.

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Lamar has shown incredible margin and sales resilience in the face of economic recessions.

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Currently, data from NYU Stern tracks the financial performance of 213 REIT’s. The average REIT in their universe trades at 22.67x EV/EBITDA and 51.90x EV/EBIT. This would imply that Lamar trades at roughly a 50% discount to REIT peers, despite its higher yield and stable operating performance across multiple decades.

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Conclusion

As the company lengthens its trading history as a REIT and garners more coverage, don’t be surprised to see the multiple expand towards the industry average given Lamar’s superior operating performance and dividend yield. Until that multiple expansion occurs, investors can enjoy a stable and reliable 5% dividend.

For more ideas like this one, check out GuruFocus’ High-Yield Dividend Stocks List or the rest of R. Vanzo’s Articles.