OUTFRONT Media ( OUT Quick Quote OUT - Free Report) owns a diverse portfolio of advertising sites, both geographical and industry-wise, in the key markets of the United States and Canada. However, stiff competition from other advertising channels and an increase in expenses amid the current market scenario have been raising concerns for advertising real estate investment trusts (REIT) like OUTFRONT Media and Lamar Advertising ( LAMR Quick Quote LAMR - Free Report) . OUTFRONT Media faces stiff competition from other outdoor advertisers for customers, display locations and structures. It also competes with other media, including conventional platforms such as television, radio, print media, direct mail marketers and online, mobile & social media platforms. This is likely to weigh on the company’s pricing power in the market, affecting profitability. Amid an inflationary and high interest rate environment, OUT and LAMR have been experiencing an increase in expenses lately, hampering their second-quarter 2023 results. While OUT reported second-quarter 2023 adjusted funds from operations (AFFO) per share of 47 cents, missing the Zacks Consensus Estimate of 51 cents, LAMR’s AFFO per share of $1.90 missed the consensus mark of $1.94. Particularly, OUT realized a significant non-cash impairment charge for its transit business, mainly due to the digital buildup of its New York Metropolitan Transportation Authority assets during the quarter. Management expects to continue incurring higher expenses for the remainder of 2023, which is likely to weigh upon the company’s bottom-line growth in the near term. We expect 2023 AFFO to decline 8.6% year over year. Moreover, a high interest rate environment is likely to raise borrowing costs for OUTFRONT Media, affecting its ability to purchase or develop real estate. A significant portion of OUTFRONT Media’s business makes use of out-of-home (OOH) advertising. This industry has to comply with certain regulations at the international, federal, state and local levels, and frequent changes in these regulations may hurt OUTFRONT Media’s business. Additionally, OUT’s trailing 12-month return on equity is negative 38.76% compared with the industry’s average of 2.88%. This reflects that the company has been inefficient in using shareholders’ funds than its peers. The Zacks Consensus Estimate for the company’s 2023 funds from operations per share has been revised 7.3% downward over the past month to $1.77. Its shares have lost 22.7% in the past three months against its industry’s growth of 0.2%.
Nonetheless, OUTFRONT Media’s efforts to convert its business from traditional static-billboard advertising to digital displays bode well. This has helped it expand the number of new advertising relationships, providing scope to boost its digital revenues. We estimate the company’s total revenues to increase 3.7% year over year for 2023 and 5% for 2024.
Also, its strategic acquisitions to enhance portfolio quality are encouraging. Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.