Description

Outfront owns and operates outdoor advertising properties, primarily digital and static billboards, and metro transit contracts.   Billboard contracts are typically structured as 4 weeks to 1 year, with digital being shorter than Static. The company had 781 digital boards and more than 44,000 billboards total.  Approx 25% of the company's revenue is derived from NYC metro area and 15% from LA, California.  40-50% from Nat'l advertisers.  Outfront is a CBS spinout in March 2014 and converted to REIT in July 2014 which awards favorable pass through tax status of dividends.  Through a July 2015 Asset swap with Independent Outdoor, the company pruned it's non-core static portfolio and increased digital properties in Metro Boston.  It's $94MM half-cash, half stock acquisition of Dynamic Outdoor increased footprint in metro Canadian locations (Toronto, Montreal, Calgary, Edmonton, Vancouver) for purely digital assets (52 total or ~$2MM/board)                                                                                                                                                                                                                    

Shares of outfront trade a slightly above a 6% yield for a REIT that a) has the ability to grow the dividend, and b) is increasingly positioning itself as a portfolio of media properties that will compliment mobile geo fenced and interactive ads.

Current dividend is safe and has room to grow for the following reasons:

• Q1 results cannot be annualized because it’s seasonally the weakest quarter.  For example, OUT did $230MM in FCF (CFO less Total Capex) in 2016 and Q1 ’16 was only $19MM in FCF versus Q1 ’17 of $15MM.  Revenues show a similar trend for Q1 versus rest of year.

• There are $16MM annual of OpEx cost cuts specifically being implemented with completion at year end 2017.

• Baked into the $60MM of annual capex is $40-45MM of discretionary growth capex, leaving maintenance capex of $15MM-$25MM.

• Previous two bullet points together are $40MM to $45MM in add’l cash flow not requiring revenue growth to underwrite.  For comparison, the current quarterly dividend on pro forma share count is an outlay of $202MM/yr.  For comparison, trailing FCF (CFO less TOTAL CapEx) is $224MM.

• The company expanded DC and LA transit contracts during 2016 and in fall 2016 won the Boston transit contract (MBTA) which is expected to generate $136MM in ad revenues over 5 years (after digital upgrades) with 70pct going to outfront.

• The company acquired Dynamic Outdoor assets in June, representing 52 digital billboards in several Canadian cities (Toronto, Montreal, Calgary, Edmonton, Vancouver digital boards).  I haven’t seen revenue indications but 1) Lamar reported at year end that it’s digital boards on average generated revenues of $105,000 per board, and 2) applying that same number to these assets doesn’t fit with reality as it would imply a 17x revenue multiples. More likely is that Outfront paid somewhere between it’s own 3.5x revenue multiple and 6x, meaning they’re picking up revenues of between $15MM and $26MM.  

NYC MTA contract overhang

Since the NYC MTA contract expired and went into some sort of month-to-month basis, Outfront was expanded LA and DC transit contracts and won the Boston contract.  

The NYC transit contract generates about $200MM/yr to Outfront at about half the margin (~35% per mgmt) as traditional outdoor bulletins and posters.  The EBITDA hit would be about $70MM versus $430MM in annual EBITDA.  Recent transit wins ($20MM in annual revenues at least) and the Dynamic acquisition (at least $15MM in revenues I’m speculating) would buffer some of that.

Positioning itself as prime media properties in urban markets to compliment mobile ad campaigns.

• While radio, newspaper/print, and now TV come under ad pressure and lose share to digital, out of the home continues to grow.  It’s the last viable big audience media asset where advertisers can reach a mass audience without time-shifted viewing, fast-forwarding/skipping, or clickouts/click to close/pop-up blocking.

• What if we’re all in driverless cars in 10 years staring at our phones?  Outfront has expanded its urban and its digital footprint, many of these assets sit in pedestrian-heavy urban environments.  Moreover, digital boards have begun to marry mobile/web ad campaigns and even radio campaigns in a synchronized fashion (https://adexchanger.com/omnichannel-2/syncing-radio-home-actual-thing-can/).  The commercialization of this technology will do two things: 1) increase census measurement and customer/viewer transaction data where the ad is transaction oriented and 2) increase the relevance of digital billboards as they complement a multi-screen or multi-media ad campaign.  All of Outfront’s recent transactions have been about gaining greater access to larger urban/city centers and increasing digital displays with the July ’17 asset swap for boston assets and the June ’17 acquisition of digital boards of Dynamic in Canada.  As part of the former outfront swapped away it’s rural assets.  These two noted transactions represent almost entirely digital boards – 68 digital and 2 static.

• It trades cheaper than lamar across almost any metric.  Part of this is due to the NYC MTA contract overhang, that represents 15% of total revenues.  Both Lamar and OUT trade much cheaper than the entire REIT space by ~5 EBITDA turns, and Outfront carries 2% more yield than the REIT index and 1.5% more yield than lamar.  To boot, OUT is building a portfolio of assets that fits well ten years from now with mobile/digital applications, geofencing, etc.

Valuation

Outfront trades at ~2x less than Lamar on a 2017 EBITDA basis (at 12x vs. 14x) and approx 3 turns less on an P/FCF basis (at 14x vs. 17.4x).  OUT shares yield 6.1% vs. Lamar’s 4.5%, although OUT’s EV is 40% debt and Lamar’s is 25%.  The larger REIT space trades at ~18x ‘17e EBITDA and mid-15x on ‘18e EBITDA.  

I estimate Outfront shares have ~$2 or approx 9% of downside (aside from a macro event/recession) and $7 or 31% of upside, before factoring in the 6% annual yield.

Outfront shares are worth ~$30/sh using a blend of DDM (9% req ret and 4% div growth), 13.5x 2017 EBITDA (still below Lamar and well below REIT industry), and DCF (10% req equity return and 2.5% perpetual FCFE).  If they lost the NYC MTA entirely, the ebitda impact (net of recent transit wins/expansions) should be no more than $60MM and a downward revision to 2017 consensus EBITDA to $390MM.  At 13x, that’s ~$21/sh pro forma for shares issued in the Dynamic acquisition.

Catalyst

• Retain at least part of the NYC MTA contract, decision expected in 2017.
• Show improved operating results recent acquisitions/swaps, cost cuts, top-line organic growth