Is Lamar's Conversion to REIT Beneficial for Investors? - Analyst Blog

Lamar Advertising Co. (LAMR), which is undergoing a formal transformation to a REIT (real estate investment trust) to capitalize on a seemingly more favorable tax environment, is expected to benefit in the long run. Investors looking for high dividend yields have historically favored the REIT sector. This is because the U.S. law requires REITs to distribute 90% of their annual taxable income in the form of dividends to shareholders.

Moreover, the company has a large and growing presence in the transit advertising market, with more than 40,000 transit advertising displays in 16 states, Canada and Puerto Rico. Also, its internal and external investment activities have allowed it to capture a considerable share of localized outdoor advertising markets. Lamar currently operates around 89% of privatized state logo contracts that covers more than 128,000 displays.

Lamar is further expanding its localized billboard advertising businesses through a combination of organic growth and strategic acquisitions. Consequently, in August, the company disclosed the buyout of a regional firm – Marco Outdoor Advertising, Inc. – to strengthen its presence in the New Orleans region.

In August, Lamar reported second-quarter 2014 results with net income per share decreasing by 33.3% to 16 cents from 24 cents reported in the prior-year quarter, due to a loss on debt extinguishment expense. Also, operating income and adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) declined on a year-over-year basis.

Although the company enjoys a significant market share in many of its small and medium-sized markets, it faces competition from other outdoor advertisers and other forms of media in all its markets. Also, though the continuous acquisition of outdoor advertising assets is encouraging, increased capital expenditures and higher expenses related to these could reduce free cash flow and pressurize margin, hampering the financial performance of the company.

For deeper insight into Lamar, you can refer to our updated research report, which was issued on Sep 2, 2014.

Over the last 30 days, the Zacks Consensus Estimate for FFO per share for 2014 moved down by around 23% to 96 cents. However, for 2015, it moved up by 6% to $1.60. Consequently, the company currently has a Zacks Rank #3 (Hold).

Stocks That Warrant a Look

Investors interested in the REIT industry may also consider better-ranked stocks like DCT Industrial Trust Inc. (DCT), Extra Space Storage Inc. (EXR) and Gladstone Commercial Corp. (GOOD). All these stocks have a Zacks Rank #2 (Buy).