Lamar Advertising Company (LAMR) Earnings Call Transcript & Summary

Welcome to the 1:40 p.m. session at Citi's 2020 Global Property CEO Conference. I'm Mike Rollins with Citi Research. We're pleased to have with us from Lamar, Sean Reilly, CEO. This session is for investing clients only. If media or other individuals are on the line, please disconnect now. And disclosures are available up here and on the webcast for the Disclosures tab. For those in the room or on the webcast, you could sign into liveqa.com and enter code Citi2020 to submit any questions or you can just raise your hand. So it's a real pleasure to welcome from Lamar Advertising, Sean Reilly. Sean, I'm going to turn it over to you to introduce your company and provide the audience with 3 reasons why investors should buy your stock today, and then we'll begin Q&A.

Great. Great. Hey, thanks for having me, Mike, and thank you all for your interest in Lamar. Three reasons. Well, I'll start with I've been doing this a long time. I've been with the company 30 years and I have never seen the fundamentals in our industry any better. More people are spending more time in their commutes than ever before. That means they're spending more time with our medium, which means the value proposition of the space we rent to our tenants is ever more powerful. Conversely, our competitive media are losing their audience. Think newspapers, think yellow pages, think radio. And so what's happening is that share, particularly at the local level, is coming our way. Last year, for example, we grew faster than every other measured media on the planet, except what you do on your phone. So that's reason number one. Great fundamentals. By the way, as part of those fundamentals, we have a huge moat around our business model. And over 80% of our markets, we have an over 80% market share. That basically means we own all the billboards in places like Little Rock, Tallahassee, Baton Rouge. So when you think Lamar, think middle market, primarily, dominant market shares with a tremendous moat around the business model because we're regulated at the federal state and local level. So first of all, great fundamentals. Second of all, since we became a REIT in 2014, we have increased our AFFO per share, our EBITDA and our distribution by over 8% per annum. Now that's a nice track record. Consequently, we've dramatically outperformed the REIT index over the same time period. This year, we've guided to $6.05 to $6.20 per share and AFFO per share. And as I said on our earnings call, we feel pretty good about the high end of that range. We're off to a fast start in Q1, as I mentioned on the call. So I would say that's reason #2. And I'm happy to get into the numbers from '14 to '19, if you want to know the actual numbers. And then number three, we're still cheap. Our yield is around 5%. Our AFFO per share multiple is around 13 or 14, our EBITDA multiple is around 13 to 14. You all are paying a lot more for real estate assets that quite frankly, have no more powerful a business model than we've demonstrated since we've been a REIT. So I would argue that, yes, that's reason #3. Time to jump in now.

Great. And then one question that we're asking all of our participants is ESG is of increasing importance for all company stakeholders. What is the one thing your company is doing to improve your overall ESG score over the next 12 months?

Great question. Over the next 12 months, we're just going to tell the story of what we've done in the past decade. We've invested over $100 million, for example, in lowering our energy bill. We've deployed 78,000 super efficient LED lights that have lowered our lighting bill on our structures by 73%. We paced the industry in solar deployments. Lamar is the largest deployer of distributed array solar in the world. We have a combined footprint that generates 1.7 megawatts. Over 7,000 solar displays. We've invested in smart grid technologies to make sure the lights aren't on when they shouldn't be. And like I said, we've invested over $100 million in those activities. So yes, we kind of -- for our industry, we put the E in ESG, we really have paced the industry. Recycling initiatives, we have 1 disposable material. That's the material that our tenants print on when we put it up on the billboard. And several years ago, Lamar brought the industry around, and we converted over to polyethylene, which is 100% recyclable. And to the extent we're still using PVC, we have a relationship with a company called Rareform and 100% of our PVC is repurposed. So we're doing well on the sustainability front. On the social front, ESG, we rent advertising space to our tenants. We also give away $150 million in ad space to thousands of local and national nonprofits every year. So we do our part there. And then on the governance side, let me just mention a couple of things. A few years ago, Forbes Magazine did an exhaustive analysis of every public company in the world, 10,000 public companies, to find out who they would deem the most trustworthy. And Lamar was deemed one of the 100 most trustworthy companies in the world because of the transparency and accuracy of our financial disclosures. On the Board front, we're diverse, 1/3, women. We've been recognized for that. So Mike, we're just going to tell the story this year.

Great. Well, speaking of the story, as you mentioned, you've been a REIT now for a number of years. But this is your first time that you're here at the conference. Can you talk a little bit more about why you made the decision to become a REIT? How you feel it's gone? And if it's been complicating at all in terms of the features of being a REIT?

We are one of the almost perfect assets to be a REIT. I'll get into reasons why. But the reason we didn't convert earlier, real -- billboards have been recognized as real property for REIT purposes since 2007. At that stage of the game and until 2014, we had a lot of depreciation and amortization and didn't feel the need for the tax shelter benefit of being a REIT. We converted in '14. The reception has been fantastic. And as I said, our stock has well outperformed the RMZ. And sort of all good on that front from a shareholder point of view. From an operational point of view, our CapEx is discretionary. And it's also the kind of thing that we can turn on and off on a board-by-board basis, such that we can still generate tremendous amounts of free cash flow after the distribution, after interest, after CapEx, after tax leakage. So that enables us to, unlike some other REITs, number one, maintain reasonable leverage; number two, not be serial equity issuers. We can fund acquisition-related growth through free cash flow.

And for those that are not familiar with the out-of-home business works. Can you give us a brief overview of the business and of Lamar's portfolio, the structures that are real estate and your advertisers that are your tenants?

Sure. Simple business. We rent the right from a landowner for the right to put a big structure on it. It's a big pole with a big advertising space on it. And we rent that advertising space to our tenants. Pretty simple. Our tenants are hugely diversified across industry and size. At any moment in time, we'll have 45,000 to 50,000 tenants. No single tenant represents more than 2% of our business. The -- we're hugely diversified across geography. If you go on our website, lamar.com and hit the Browse Inventory section, a map of the United States will come up, and you're going to see that we have billboards in every nook and cranny in the United States. Literally, 180,000 billboard faces on 80,000 structures. Under about 20% of our tenant revenues, we actually own the ground. And under the other 80%, we have ground leases with landlords who are landlord partners. About 70,000 ground leases. Huge portfolio. Managed by 200 lease professionals and 200 offices around the country. It's our largest expense. Our ground lease expense runs about 20% of our revenues. That expense rose about 1% a year. All of our other expenses, combined with that, grow about 2% a year and have been growing at that pace for the last decade.

And my understanding is you operate in 45 states and in Canada, with more of a middle-market focus than competitors such as Outfront and Clear Channel. What does the competitive landscape look like in your markets? And do you frequently see new entrants? And how much supply is being added?

Good question. So in the United States these days, there are literally no net new billboards being built. So in terms of billboard structures, there is no supply being added. And I kind of went into that in my intro with the regulations, which are incredibly strict at the federal, state and local level. And again, in Lamar's footprint, we're primarily middle market. So in those middle markets, we'll have 80-plus percent share in 80-plus percent of our markets. So you drive around Miami, for example, you're going to see Upfront, you're going to see Clear Channel, you're not going to see Lamar. But if you went to Tallahassee, Florida, you'd see nothing but Lamar. And it's pretty much that way across most of our footprint. We have some inventory and some operations in top 20 DMAs. We're in New York, for example. We're in Atlanta. We're in Dallas. We're in Chicago. But the trick for us in those markets is to only have large-format, high-quality billboards that are sold individually by location, right? So in essence, you're only competing in that case against another large-format billboard that happens to be within the same mile radius, let's say. But in those cases, again, large-format billboards in major metros are sold individually by location and contracted for that way. And usually contracted for 6 to 12 months.

Now in the case where you're leasing the land, can your landlords replace you with a competitor?

No, it's virtually impossible. And here's how that works. So there's a myriad of local zoning regulations that have touched our real estate, like it touches other real estate: time, place, manner, industrial, commercial, residential, et cetera. But there's also a second layer of regulation that is usually a billboard-specific ordinates. And it limits 1 billboard to every 1,500-foot radius. And since we have thousands within a given DMA, it makes it impossible for another billboard to be located. That's kind of how that works. If one comes down for whatever reason, it doesn't happen a lot, but it does happen, the permit stays with us. And if an area is freed up, we can just go down the street, cut a deal with another landowner, put up another billboard. But because we have the permit and control that matrix of ordinances, pretty much gives us the upper hand.

And in terms of the tenants themselves, what kind of leases or contracts are they signing? And you mentioned it's diversified, but are there certain customers or categories that are really important to your business model?

Sure. So our largest tenant category is services. These are local services. Think people that used to buy the yellow pages, lawyers, accountants, plumbers, lots of lawyers. Second largest customer category is restaurants. Don't think destination high end, think quick service, McDonald's, Cracker Barrel, the like. And that's about 11% of our business. Services is about 11% or 12%. Then you get down to retail, which is about 9% of our tenant base. Retail, don't think Bloomingdale's, think thousands of local mom-and-pop retail establishments on Main Street U.S.A. Then you get down to categories that are around 5% or 6% of our book. Health care, financial institutions, auto, education, real estate. And so those are the main tenant categories. And again, like I said, no single tenant represents more than 2% of our space sales.

You mentioned earlier the growth profile you've had over the last few years. I'm curious if we could take a step back a little bit further, just on the growth during this economic expansion. And if you can illuminate what happened in the downturn, '08, '09? And what would you expect to happen to your business in the next downturn, whenever that should be?

Sure. So like I said, I've been doing this a long time, I've managed our company through 3 garden-variety recessions. And in a garden-variety recession, we've never been down more than 2% and never down in consecutive years. Because of our market shares, we're able to hold the line on space pricing, on rate, suffer a little bit in occupancy. And then when we come out of it, occupancy comes back faster. So it's not unusual for us to really rock it out of a garden-variety recession. So if the next one is garden variety, we're going to be just fine. The Great Recession was a tough time. On the top, we were down 13%. But because of the way we managed expenses and managed our CapEx, our free cash flow was actually up that year. And had we been a REIT, we would have honored our distribution that we paid the first year we were REIT in 2014. Not a lot of REITs could say that. And again, that's because our CapEx is variable and discretionary. We can throttle it back from a run rate of roughly $110 million to $120 million a year turn next to 0. And we did that. And the billboards did not fall down. We're not contractually obligated like much real estate to do tenant improvements. Our -- like I said, our CapEx is discretionary.

And just more on the topic. On a normal year, how would you frame the amount of maintenance and capital that you put in to maintain the assets relative to that discretionary piece?

Great question. So last year, our maintenance CapEx ran about $48 million in our regular CapEx because we were coming off about $700 million in acquisitions, ran a little heavier. But in a garden-variety year, $50 million in maintenance CapEx and $60 million or $70 million in growth-oriented CapEx.

And you mentioned earlier just as you're thinking about recession scenarios, you mentioned you were able to grow free cash despite the drop in revenue when we had the larger downturn in '08, '09. Just in terms of the flexibility with your -- the rest of your cost structure. Can you just describe the other flex points that are in the model beyond just the lease expenses that you have?

So net revenue, $1.75 billion last year. Lease expense ran 20% of that. That expense base grows about 1% a year. The next biggest expense base will be people. It runs about 17% of net revenues. Cost is largely fixed. And doesn't grow or do I expect much inflation in it. We have 3,600 employees gathered around 200 offices. And I've kept up on the wage front with wage inflation. In fact, we've been granting wages to our rank and file that are -- raises that are actually higher than the industrial average the last 10 years. So in a good shape there. We have some employees that are commissioned. These are the people that rent our space to our customers. They are on our payroll. They're not third-party folks who lease-up our space. They're paid on commission. And so that can be variable with how we're doing. But in general, it's, like I said, about 17%. Then you have to go all the way down to our light bill, which runs about 3%. That's the light bill that I referenced earlier that, at night, lights up our space so that people can see our tenants. And that's about it. It's pretty simple.

And then you mentioned earlier about the outlook for 2020, and you referenced your aspirations for the high end of the range. Can you talk a little bit more about what's happening in your business today? The outlook for 2020? There's some expected tailwinds from political and programmatic in the 2020 outlook.

Yes. And on both fronts. So political years give us an incremental lift. In an off-cycle year, we'll get about $5 million in political. This year, we're anticipating something around $13-ish million, so incremental lift of $8 million. Programmatic. Without getting too technical, programmatic is the way ads show up on your phone. There are digital ad dollars and traditional ad dollars. They don't talk to one another. The digital ad pie is doing this, traditional ad pie is kind of doing this. We want to be over here. In order to be over here, we had to learn their language. When an ad shows up here on your phone, the digital dollars drop into an algorithm. If the particular app or a publisher has the right cost per thousand impressions in the right demographic, it gets the buy. Well, we're now doing that with our digital billboards. Last year, we did it really for the first time on any scale. And we brought in $13 million in incremental dollars. We think we're going to bring in about $20 million this year. So that's an incremental $7 million on top of what would otherwise be our organic growth.

And can you discuss the potential risks surrounding the coronavirus for you and your customers?

Sure. So number one, we're domestic U.S. almost exclusively, we have a few operations in Canada. But when you think about Lamar, think domestic U.S., great geographic diversity, right? So 200 offices sprinkled literally all across the country. Why do I raise that? A part of what companies need to worry about is workforce disruption. I think we're in pretty good shape on that count. Most of our folks, if they had to, could easily work from home. And it's not likely that it's going to hit all 200 markets. And then there's supply chain disruption. We really don't have a supply chain, so I'm not too worried about that. The thing that would worry me is if it creates a massive macroeconomic headwinds. And certainly, I don't know that we would be immune to that or would our customers be immune to that. Like I said, we're all over the country. So destination markets you might be worried about, but no one market in Lamar land generates more than 3% of our revenues. So let's say Vegas somehow takes a dive because of this, our business there would suffer, but it's, again, less than 3% of our business.

And then maybe just taking a step back. You mentioned earlier just the communication between digital and analog kind of advertising model. And when you just look at the state of flux in the industry between Google, Facebook, Amazon, Netflix, they've succeeded while traditional channels such as newspapers have struggled. How has the out-of-home advertising fared as new technologies have entered into the market? And can you talk about where you see that fitting in into the future?

Yes, great question. We -- what we're seeing is a marriage, if you will, between what our customers are doing in trying to talk to their customers on the phone and what they're doing with our digital inventory and the real world. So you got the virtual world and the real world, and there's kind of a marriage. For example, we take direct feeds from many of our customers' Facebook accounts and Twitter accounts or web pages. So if something's trending, for example, something is really moving for them in social media, we can have it up on the boards in 5 minutes, so that they know that it's an ad that's motivating. They know that it's the right message. We can also take cues from the phone based on phones that drive buyer inventory, to tell our customers that they're getting in front of the right audience. The trick in advertising is to get on space that's got the right message in front of the right audience at the right time. And we use what happens on the phone with our customers to inform what goes up on the billboards. Now we adhere to all privacy regulations in California and the European standard. But we are also pinging your phone. Now what do I mean by that? Geofencing is a technology that surrounds us all. Any time you go into a grocery store. We geofence our billboards, let's say, car, phone goes within that radius of the billboard, same ad that's up here, shows up here. How does that work? Let's say, the customer is Budweiser. And Budweiser wants to reach males 21 to 45. That's the demographic they want. Let's say, somebody has the ESPN app, and that's how they check their scores. Phone, right demographic, goes within the radius, the Bud ad that's up here, pings the phone when you open up your app, you see the exact same ad. So that's how that works. And increasingly, we're doing that on behalf of our customers.

And just a reminder, if anyone has a question, you just push the button on your mic. Please go ahead.

One of the points you made at the outset, the 3 points, was on valuation. It looks like the market more or less has traded the shares at roughly a stable valuation over a number of years on a price AFFO or EBITDA multiple basis. In real estate, generally, people obviously look to the private market to a certain degree as a counter to where things should be valued. There's cap rate compression that maybe drives multiple expansion and other traditional real estate property sectors. Can you talk at all -- is there a private market for your business? Can you talk about trades that have taken place in the private market? How those valuations may be compared to your own public market valuation? Something to give us an indication of why you might think the shares are undervalued.

Yes, great question. Relative to other real estate classes was my main point. We traded around 13, 14x, both EBITDA and AFFO per share to the share price. And there are asset classes in the real estate world, where it's 20, 21, 22, 23. We don't talk the language of cap rates. So when we're buying in the private marketplace, which we do every day, we talk the language of multiple of EBITDA. So in our world, we do $5 million, $10 million, $20 million cookie-cutter fill-in acquisitions all day long. I mean literally, there's a huge long tail of that activity. These are small mom-and-pops, where we're buying just billboard structures in markets we typically already dominate, right? So a family could have 20 billboard faces in a place like Little Rock. They've had them for 20 years. They decide they want to sell, they come to us. Multiples. We typically buy at a multiple of 10 to 11 forward EBITDA contribution to us. Now the seller doesn't know what we can do with their inventory. They can guess, but we don't have any of the expenses they have. So from their point of view, the multiple could look like a 15x. From our point of view, it turns into a 10. That's basically what's been happening, right? And we have a long, long track record of doing it. As a matter of fact, we do it so much and so well, and most of the analysts that follow us, assume we're going to do that when they build their financial models for the year.

We have a couple of questions in from our website. So the first is, what percent of your assets are electronic today?

Great question. So we have 180,000 billboard faces. 3,600 of them have been converted to digital. So 2% or 3%. As a percentage of our business, we did a $1.75 billion in revenues last year, $400 million of the revenues were digital. So it's 22%, 23% of our revenues, small percentage of our actual faces.

What's the opportunity to keep converting to digital? Is this -- is the multiplier similar? Is it diminishing marginal benefit? How do we look at that?

It's been remarkably stable over time. So we're going as fast as we can. We convert about 250-ish a year. One of the reasons we can't go much faster is it's a cumbersome permitting process. These are little construction projects. But that said, the economics are wonderful. We -- on a large format, digital conversion, we invest about $180,000. The payback is under 2 years. And that ROI has been remarkably consistent even as we add additional capacity. The digital portion of our footprint is growing, revenue-wise, in the low teens total, about half of that will be same board growth because it's a great product, and our tenants love it. And about half of it would be additional capacity that we're adding during the year to grow the whole platform.

Great. We'll get to our rapid fire questions. So the first one is, will your property sector have more or fewer public companies a year from now?

Same number. There's 3 of us. Lamar is by far and away the largest and has the largest market cap and enterprise value. The other 2 are Outfront, Outfront is a REIT as well; and Clear Channel, Clear Channel is not a REIT. Clear Channel is the spin-out from the old iHeart bankruptcy, and I think they are still saddled with a little bit too much debt. But those are the 3 public companies, and I assume that at least U.S.-wise, there'll still be 3. There's an international company called JCDecaux, which also does a good job and it's also public. So I guess I should have said 4.

And what will same-store NOI growth be for your property sector overall in 2021? Not for you.

2021? Wow, you're asking me to look way out there.

Looking to the future.

Yes. So NOI is interesting when you're thinking about Lamar. Why don't I express it as EBITDA growth consolidated?

Sure. Great.

So yes, our consolidated EBITDA margins are about 45%. You grow the top line, 3% or 4%, you're going to grow the EBITDA line about 5% or 6%.

And what will the 10-year treasury yield be 1 year from today?

Wow, I'm not that smart. Higher.

Do you want to throw a number into the ring?

No, I -- our business is strong, our pacings are stronger this year than they were last year. I'm not seeing a recession out there. So I got to assume the 10-year is going to be higher.

What year will the U.S. enter a recession?

Beats me. I mean we're -- like I said, we're not seeing it.

Thank you for your time today.

Yes. Thank you, guys. And thank you all for listening. Appreciate it.