Company attempting to convert to real estate investment trust
Lamar Advertising Co.’s stock has jumped nearly 15 percent since Sept. 18, when Goldman Sachs said the billboard giant could be worth $54 per share if it is allowed to convert to a real estate investment trust.
Last week, a Morgan Stanley report said a Lamar REIT could reach the same value.
Lamar has asked the Internal Revenue Service for a ruling on the conversion of the Baton Rouge billboard and outdoor advertising company to a REIT.
Both Goldman Sachs and Morgan Stanley said they expect IRS approval, but cautioned the stock could take a hit if approval is not granted.
Goldman said the ruling could come by the end of the year.
Lamar would be the first publicly traded billboard company to become a REIT.
Lamar’s stock would be worth more as a real estate investment trust, in large part because of tax savings, according to Morgan Stanley.
Under federal law, REITs must distribute 90 percent of taxable income to shareholders.
Lamar has used all of its free cash flow over the past four years to retire $1 billion in debt. As a REIT, the company could distribute some, but not all, of its free cash flow to shareholders.
Lamar always has been tough to value as a stock because the company has never earned a lot of money, said Peter Ricchiuti, who heads Tulane University’s small-cap research group. The reason is that when Lamar buys a billboard, the company must quickly depreciate it out, and that depreciation eats up most of the company’s earnings.
A REIT may more fully recognize Lamar’s strong cash flows, Ricchiuti said.
“As a stock it always looks expensive on paper. If you viewed it as a REIT, it would actually look pretty cheap,” he said.
“The REIT idea does seem to have momentum. It’s rare to see a growing number of analysts singing from the same page and not have something up,” Ricchiuti said.
Goldman Sachs said Lamar trades at a deep discount to other real estate investment trusts.
If the outdoor advertiser traded at the median level of other REITs’ valuations, Lamar would be valued at $60 a share, the report said.
The bullish reports have apparently convinced investors. Lamar shares closed at $32.66 on Sept. 17, the day before the Goldman Sachs report. The stock spiked to $37.85 early Tuesday before closing at $37.40, down 3 cents.
However, both Goldman Sachs and Morgan Stanley said Lamar’s stock could take a beating if the company fails to convert to a real estate investment trust.
If Lamar’s status doesn’t change, Goldman Sachs values the stock at $28. Morgan Stanley said the non-REIT price target is $30 per share, or $22 if there is a drastic downturn in the economy.
The IRS already has ruled that steel billboard structures qualify as real estate in the case of Whiteco Industries, a privately owned Indiana firm. However, it’s unclear whether Lamar’s digital boards will qualify.
Goldman Sachs believes the digital boards can be part of a REIT but not Lamar’s transit signs, those on bus shelters, benches and buses, or logos, which advertise nearby gas, food and lodging near exits of major roadways.