There are some interesting niches in the real estate investment trust (REIT) sector, and owning billboards is definitely one of them. Outfront Media (NYSE: OUT) is one of the big players. But how desirable is it to get into this specialized sector today? The answer really depends on what you're looking for. Here are some things to consider before buying Outfront Media.
It was not a good year
Billboards are basically advertising that reaches people on the go, either driving, using mass transportation, or wandering around town by foot. Since the coronavirus pandemic basically kept people indoors throughout a good portion of 2020, it is safe to say that Outfront Media has been facing material headwinds. Indeed, why pay to advertise on billboards if few people will see them?
But it's important to understand just how bad it was for the REIT. Revenues in 2020 were down by a huge and painful 30%. The fourth quarter's 31% was roughly in line with the full-year figure, too, so Outfront Media didn't see a roaring business recovery as the year progressed. It got so bad, in fact, that the company suspended the dividend.
REITs are specifically designed to pass income on to shareholders, so this is a pretty big statement. As 2021 gets underway, Outfront Media is only saying that it plans to pay the minimum required dividend to retain its status as a real estate investment trust. That could be accomplished with preferred stock dividends, so common stockholders shouldn't get their hopes up on the dividend front.
What to expect from here
It should already be obvious that Outfront Media is in turnaround mode, which means that most investors will probably want to avoid it. That's particularly true if you are looking for dividend income, since there's none to be found here at the moment. In fact, until the dividend is reinstated on the common, this is probably best left on the watch list for all but the most aggressive types.
But for those willing to venture into the turnaround space, the next three years could be pretty interesting. In the company's earnings release, CEO Jeremy Male stated, "We will return to positive revenue growth in the second quarter as we lap the onset of the pandemic, and look forward to further recovery in our business throughout the year." On the surface that sounds pretty good, but you have to remember that the comparisons will be very easy given the business' depressed performance in 2020. Returning to year-over-year growth isn't exactly returning to growth from a longer-term perspective. That said, you have to start somewhere and that's the first step.
The next big thing to look for from the company is a return of the common dividend. It's not clear that this will take place in 2021, given the company's comments. And even if it does, the payment is likely to be relatively modest. That makes some sense, since billboard advertising will probably remain subdued until people head back into the office in larger numbers.
Which brings up an even bigger, and perhaps more important, unknown -- what will work look like in the future? If working from home in some fashion becomes an increasingly prominent trend, as many seem to expect, a recovery in billboard spending could be drawn out. At the very least, it's likely to be a year or two before there's a good answer, which suggests that it could take three years for Outfront Media to get back to pre-coronavirus business levels. And if commuting doesn't return to the same levels as before, Outfront Media's business could end up under pressure for much longer.
On the watch list
When you step back here, Outfront Media is facing a tough road as it tries to work back from the pandemic hit it has suffered through. Given what we know today, it could take three years for that to happen, maybe longer. So, "better" is the likely trend over the next few years, but that's not saying much given the hit from the pandemic.
Most investors will probably want to avoid the REIT until it reinstates a common dividend. That said, turnaround investors will likely begin to see signs of a business upturn in the second quarter when the company starts to lap the pandemic's onset. But, given the still weak fourth quarter 2020 top-line numbers, it may not be a huge reversal of fortune. In other words, it might make sense, even for more aggressive types, to see how the first quarter plays out before jumping in here.