Brad Thomas on Outfront and Recession

Brad Thomas writes for Seeking Alpha where he specializes in publicly-listed REITs. In addition, Thomas is the Editor of the Forbes Real Estate Investor, a monthly subscription-based newsletter.

Insider has followed Brad for some time and his take on OOH REITs is thoughtful and always worth a read.  Here is his take on Outfront Media and how they might be impacted in a recession.  Insider thanks Brad for permission to reprint.

From Brad

There’s no such thing as a perfect investment.

In practice, when run by well-connected, well-experienced management, REITs let you into the moneymaking world of real estate without taking on too much of the associated risk. But in both theory and in practice, there is still at least some associated risk.

Last week, we explored a short list of the best-positioned REITs to consider in case of a recession. Today though, let’s look at the opposite side of the real estate coin: companies that won’t be so properly placed when the chips are down.

After all, successful investing isn’t just about knowing what’s worthwhile. It’s also about knowing what to avoid.

Outfront Media (OUT) is one of the largest out-of-home media companies in North America with a portfolio of around 500,000 digital and static displays, which are primarily located in the most iconic and high-traffic locations throughout the 25 largest markets in the U.S. The company went public (IPO) on March 28, 2014 and began operating as a REIT on July 17, 2014.

In addition to high capex costs, the billboard business model does not provide the income sustainability warranted by other property sectors (due to the fluctuating ad-based business). This means some of the underlying assets owned by Outfront could be subject to uncontrollable risks (economic, governmental, and competitive), as well as declining revenues.

Keep in mind, we upgraded OUT from a buy to a strong buy in October and since that time, shares have returned 23%. Now, we are downgrading the company to a regular Buy (remember, our Strong Buy target is 25% returns in 12-18 months). However, we are becoming a bit less bullish as we recognize that a recession is on the horizon.

Source: FAST Graphs

Insider’s take – Are you making plans for a potential recession?  If you are not, you should be planning for a 12 month cycle where you could see at least a 10% reduction in revenue.  Prepare now so you can continue to meet your fixed costs including lease and loan payments and tax and permitting obligations.   The best acquisition opportunities occur in a recession because prices fall.  Now’s the time to get ready.

Outfront is in pretty good shape with an overall leverage ratio in the 4.5 range.  Though not a REIT Clear Channel, at leverage over 8 times, could struggle in a recession as national revenues tend to be more volatile than local.

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2 Comments

  1. I am very curious to why he thinks a recession is on the horizon? All economic indicators are producing positive statistics. The market had a huge correction at the end of ’18 and beginning of
    ’19. That market has wisened investors and depending on how some international tariff talks go with China and the European Union the market is poised to really take off.
    Help me understand the downside???

  2. The sad reality is we seem to repeat cycles. Insider would be surprised to see a steep recession, but will not be surprised by a pull back in the next 18 months. The most important thing is to have yourself positioned to react quickly if revenues do start to soften.