As a Citi Research, and we're pleased, very pleased to have Sean Reilly, CEO, President of Lamar. Sean, how are you?
I'm good, Jason. All good.
Good. So this session is for Citi clients only. Disclosures are available at the corporate access desk. If you'd like to ask a question, and we love, absolutely love audience questions, please raise your hand. If you're shy, you can go to live.q4.com and enter the code GPC25. So I don't know, maybe I'll just start with an introductory question, Sean. There's a lot of REITs here at this company, or at this conference. So what would be the defining characteristic that you think makes the outdoor business an attractive business? And to answer the question, I think it's worth highlighting what it is specifically about Lamar that makes it unique relative to other outdoor advertising REITs that might publicly trade.
So I'm going to have to dance around a little bit because I've got a board member in here who's presenting on behalf of his company, Marshall, and the EastGroup. So, you know, I can't trash the other asset classes that are at the conference. Adding to the pressure, I've got my son in here who's on the IR team at Prologis. So it's like, okay. Look, the outdoor business is, it's a unique real estate asset class. It is, I would say the defining and most important characteristic is there's severe constrictions on supply, which is not the case with a lot of real estate asset classes. There are no net new billboards being built, right? So that's very helpful. That's the industry in general. Lamar specific, the defining characteristic is our market shares. Our local market shares run 85%.
So in places like Little Rock and Baton Rouge and Tallahassee and places like that, which is 80% of our footprint, we have 80-plus% market shares. And that puts us in a very powerful position. So I would highlight those two things. Do you want some more?
No, that's good. Maybe you can say one word about, because I think it's so important in the current investor debate about your philosophy as it relates to transit contracts and your philosophy as it relates to geographic exposure?
Sure, so when you think about Lamar, I think middle markets, as I mentioned, middle small market, market shares is an outgrowth of that, but also tenant characteristics are an outgrowth of that. For example, we are 80% local customer base. Our customers are touched by over a thousand account executives. It's a very steady business. Our tenant base is extremely predictable. Our categories and verticals shift very slowly over time. It ebbs and flows in, you know, ones of percents, right? We have no single tenant that represents more than 1.5% of our total billings. That tenant happens to be McDonald's, and that's not a single tenant. It's franchisees that buy through buying cooperatives, so when you really think about it, there's no one single purchasing agent that represents more than 1% of our business.
You know, any given moment in time, we have 40,000 tenants touched by those 1,000 account executives. Now, when it comes to transit, there's a similar philosophy. We operate that in small and middle sized markets. We have a large portfolio of small contracts. And that's very important because if you're wedded to something like the New York MTA or Atlanta's Hartsfield Airport, you have a tendency to do irrational bidding when the contract comes up to be let. They're also extremely competitive. Whereas we, when we show up and sit down with a small market transit authority, we're often the only people there, right? And so our portfolio looks different. You know, all that said, we are predominantly billboards. On a business book of $2.2 billion, transit revenues and airport revenues combined represent about $160 million.
You know, on that $160 million, you're going to want to put about an 18% margin on it, 15% or thereabouts, depending on how things are shaping up there. So it's not a large part of what we do, and I like it that way. The transit business is not as good as the billboard business. Now, what does the other 20% look like in our footprint? We are in places like Atlanta and Dallas and, you know, places like that, San Diego, et cetera. But our product mix is very carefully curated. We have no small market screens and small market inventory. I'm not. I'm sorry, small screens and small formats. And that's important. We have large format only, and that space is contracted for each unit individually. That's important, and it's all about location, location, location rather than overall broader market distribution.
And if I'm getting into the weeds here, just stop me, Jason. But that is very important and distinguishes us from the portfolio at OUTFRONT and the portfolio at Clear Channel.
Okay, that's great. If anyone does have a question, feel free to raise your hand. If you don't mind, I want to roll the clock back just to go back to 2024, so during the fourth quarter, I think you laid out on a midpoint basis, your AFFO guidance was $7.75. You raised your guidance twice during 2024. And when you exited the year, you ended up at $7.99, I believe, of AFFO, so can you just spend a second and talk about what was it that led to those upward revisions and then you ultimately beating the high end of your last range?
So when we go into the year, we budget late. So we get a pretty good look. So all of the budgets come in and get finalized at the end of January, right? The process is highly decentralized and bottom up. That's important because when those budgets roll in, we get our first look at how the field feels about how they're going to do, right? It's also important to know that we're a heavily incentive comp based company and that our local management runs every aspect of their P&L top to bottom. And they get a profit sharing of 10% of every dollar they collect over their cash goal that we agree on in January. So they're kind of incented to be cautious around their budgeting, right? The other thing that happened last year was we had a serious anomaly in February.
It was a leap year and a Super Bowl in Las Vegas where we have a disproportionate share of the inventory. So consequently, February was up 10% last year, which is definitely an anomaly. It was great last year, not so good this year. It's making for a very difficult comp Q1. So our Q1 is going to come in well below the guide of up 3% for the year. And what we're seeing in our pacings right now is each successive quarter getting better as we progress through the year for 2025. And last year, sort of the same thing happened. You know, our political came in heavier than we thought. That contributed somewhat to the Q4 beat. So we'll see. I don't think we're going to play out exactly like we played out last year.
But we are, I believe, you know, we came out of the blocks with a cautious guide.
Okay, that's great.
And I would add, now that we're in public, right? There's no Reg FD issue here. Our pacings are towards the top end of the range we gave a few weeks ago. So they're a little stronger than that three. That's as we sit today.
I just want to make sure I understood that. You said that the Q1 guide is going to come in below the 3% that's embedded in your guidance.
Correct. But our overall pacings for the year have us tracking towards the top end of the range we gave you on AFFO per share. Does that make sense?
Yeah, and how much visibility when you say our pacings for the year?
So these are actual pacings. These are contracts on the books as of today compared to same day last year. And as of today, about 61% of our goal is contracted for. So pretty good visibility, right? Not perfect, but pretty good.
That's great. Are there any questions on any of that commentary regarding what happened last year? Yeah.
When does that bottom up process begin and end?
Yeah. So we budget very late. You know, we want the best look we can get at a year before we lock arms and say, this is what we're going to do. Because everybody's compensation depends on hitting their number. Process starts in sort of mid-December and it finishes up the last week of January.
Can you comment on the business segments that are driving that strong pacing?
Our segments or our clients?
Clients, sorry.
Clients, okay. So our, as I mentioned, our tenant base, particularly at the local level, is extremely stable. The largest vertical we have is local services. The largest piece of that business is attorneys, lawyers. So it would be services, local services overall is about 18% of our business. Attorneys make up about 55% of that. So about 10% of our business is attorneys. And it's hundreds and hundreds of them across the country. So no single attorney represents much at all of that. But when you add them all up, it's a lot. The next most important customer category is healthcare. And think, you know, hyper local, local clinics, local doctors' offices, dentists, plastic surgeons, some large clients, some big regional hospitals are important to us. But it's mostly a pretty fragmented healthcare vertical. Number three would be restaurants.
Restaurants is not going to be tablecloth and sit down. It's going to be fast food. Our largest client, as I said, is McDonald's. We also have Cracker Barrel and Burger King and Jack in the Box and all those guys. Next vertical is going to be retail, hyper local. So don't think Walmart or Target. It's thousands of local clothing stores, jewelry stores, et cetera. And then you're dropping down to auto, give or take 6% of our book. Again, not corporate. This is not coming from GM New York. It's thousands of local car dealers, right? And that's good steady business, you know. Interestingly, I got the question about the impact of tariffs on that vertical, right? And when they don't have new inventory to advertise, they'll advertise repairs.
So instead of copy that says, come buy a new car here at X price, it's come fix your car here, right? So they tend to keep their inventory even when they don't have a tremendous amount of access to new cars. And then after that, you're talking about verticals that are, you know, 3-4% of our book.
How is that business today? Residential real estate?
It's going to be in that 3%-4% category, right? It's like eight or nine. What is, Buster, what is broker?
2.5%.
2.5%. A bigger category is developers and builders, right? I don't know if you've seen, you know, if you lived here, you'd be home by now, right? Kind of thing. And that was what? It was up a lot and it's a little north of 3%. So national's been tough for us for about 18 months. And last year, it was a real headwind until the fourth quarter. I wouldn't say it's fully back and growing. It's, I would call it more sort of stabilized. Q1's going to be kind of flattish. And then a little bit of growth as we move through the year. But at least it's not a headwind. It's just sort of not a great tailwind. And that's a long-winded way of saying local's going to carry us again. Digital's going to carry us again.
And a subsection of national that we get through a programmatic channel is growing 15%-20%. But it's off a small base, right? So yeah, the growth drivers in terms of the top line, local most important, digital, and then programmatic.
Sorry, Ken.
20%.
What percentage of that is programmatic?
Small. So 20% on $2.2 billion. And that's national broadly defined. Programmatic's going to be $50 million of that this year. So small, but growing.
Can you comment on the acquisition environment? I know last year you had acquisition environment.
Yeah, so number one, it's picked up significantly, but to back up and think out loud about what we were talking about last year, so we went into the year shoring up our balance sheet, retiring some debt, so we actually had on purpose curtailed activity last year, but we were talking about the prospects of some pretty large deals breaking loose. They're not really materializing. There were some circumstances that, you know, I'm not going to get completely into, but we had reason to believe some things would break loose that would be billion plus in terms of asset value. Not actionable now, at least in the near term, but what is happening is we're seeing a lot of activity. We're seeing some real good inventory come to market, one of which is, I would say highly likely and north of 100 million and a negotiated buyer-seller environment.
Another one just came to market. It's going to be highly competitive, auction kind of thing, harder to predict. Same order of magnitude. And then there's the little cookie cutter mom and pops that we buy day in and day out, the $10 million deal, the $20 million deal, et cetera. Those just kind of come our way. And for the most part, we're really the only buyer for those folks because of the nature of our footprint.
There's a lot of change happening at your competitors now.
Yep.
And they're changing their vision and opportunity for them to rationalize their portfolio. Do you think there'll be any opportunities there?
You know, I think they should. I'll just put it that way. You know, they're, and I knew their management team very well. Jeremy, I knew very well. You know, he retired, the CIO left, the chief revenue officer left, and they've had a little bit of turnover there. They've got an interim CEO named Nate Bryan, who I've not met yet. We've scheduled a date to get together. But you know, it just strikes me that it is an opportunity for them to rethink their exposure to transit, their exposure to markets that are outside the top 20 DMAs that might not fit, you know, their particular profile, and that would present an opportunity if they came to that conclusion.
Yeah, the transit flyout.
No, we wouldn't be interested. We would stay away from that.
But if you have a big national component in the region, yeah, national component in the region, is that something?
Yeah. So they have inventory below the top 20 DMAs that looks a lot like what we do. Very, very similar. Some of it's completely dominating local market presence like we have in places like Louisville and Columbus, Georgia and Portland, Oregon, and places like that. They also have a lot of what I would call sort of scattered hither and yon highway paint that would be complete fill-ins for us, right? We would not need any of their operations people. We would just be buying structures, advertising permits, advertising contracts and ground leases. And that's a highly predictable exercise and highly accretive. So, you know, that would be nice. That would be nice.
But given the tremendous regulatory evaluation and the short-term transit thing of the whole business.
I'm sorry, I didn't catch that.
The buyer in the whole entity then get rid of the parts that don't want to, given the tremendous valuation spread.
Yeah. Keep in mind that while as a REIT, we don't have to file HSR, there might be some thorny Justice Department issues that others would raise if we tried to swallow the whole thing. Because we do have significant overlap in the larger DMAs.
Something to get through with all the other 30-35 considerations.
Yeah.
Before your interests.
Yeah. You know, in our space, it's an unpredictable exercise. I've been through it personally three times. First time was 1999. It was awesome. Largest transaction we've ever done. We were a C Corp at the time, right, and we flew through. I had completely the opposite experience in the mid-2000s. It doesn't matter whether it's an R or a D in the White House. The landscape can shift.
Can I just ask one favor of the audience for the benefit of those that are listening to the webcast? Just make sure you speak into the mic. That's all right. That's all right. That's okay. So can I ask about your 2025 FFO guide? I think it's $8.20 on a midpoint basis. You mentioned earlier embedded in that was 3% top line growth. And you gave some other particulars, cash interest, cash taxes, and maintenance were all specified. My question is, if someone is out there and they want to take the over on Lamar doing better than 3% underlying acquisition adjusted revenue growth, what's a reasonable flow-through margin down to EBITDA? Like if you get an extra $10 million above that sort of 3% number.
Great question. I'm going to say give or take 65%.
Okay.
Our operating leverage can be very impressive if we grow the top in that, you know, sort of 4.5%-6% range and then keep our expense growth to 2.5%-3%. It gets impressive.
Okay. And then as investors are trying to pencil out sort of all of the puts and takes, you mentioned roughly $15 million of political headwinds relative to 2024. You mentioned the leap year. You mentioned the benefit of the Super Bowl that was in an attractive city last year. So those are all headwinds, right, that people can pencil out. But one tailwind, I think you're going to do more digital conversions this year.
Correct.
You said at least 350. What's the back-of-the-envelope math that your investors could do to say how much of a tailwind could that represent?
Yeah. So let me start with when we budget, and I'll kind of describe that process. The budgets are based on last year's actual and growth thereon and really doesn't include the extra juice from the digital rollout at the individual plant level. It's a long-winded way of saying there's a little lagniappe there, right? Assume that they are deployed gradually throughout the year. They don't all go up in January, right? So it happens throughout the year. You know, the crude economics are, you know, you take down, this is at the individual billboard level. You take down something that as an analog unit was doing $3,000 a month, let's say.
Yeah.
and that's average. You know, it's going to be more in Vegas, less in Tallahassee, right? When you put up a digital, you now have eight slots to sell. Let's assume we don't sell all of them. Maybe we sell five or six. The client is paying almost the same aggregate dollars. So each one is still paying about $3,000. So your lift is five or six X that. So something that was doing $3,000 is now doing $15,000-$18,000. We manage the real estate under our digital portfolio very aggressively. So you can assume that the incremental margin contribution is going to be somewhere in the neighborhood of 65%-70%. And you know, you can do the arithmetic on all that stuff.
And you know, from the advertiser's point of view, they're paying the same aggregate amount, but their cost per thousand impressions goes up because it's shared space. And not every car is seeing every ad. So on average, the average views hed allows for the viewing of 2.6 slots. So what is a normal analog CPM of three, four, five bucks cost per thousand impressions goes up to seven, eight, nine. So from their point of view, they're paying more. But they can do so much more with the space. That's why they love it.
That's great. And I just want to make sure I understood what you said. You're saying when you sort of pencil out 3% acquisition adjusted revenue growth in your guide, it does not include any tailwinds from the digital conversions that you're going to be doing in the year. It only includes the digital conversions you did last year and the benefit.
You know, kind of sort of yes and no. You know, I'm not saying we're sandbagging, but at the end of the day, I don't want a disincentive for our local managers to be very aggressive on a digital rollout.
Right.
And if I built it into their budget and they kind of missed the mark on one of their pro formas on a deployment, it could cost them, you know, bonus, right? So, you know, I want to make sure that for them, it makes their getting their bonus more likely.
Understood. So you mentioned, at least I remember this from the last call, maybe you've said it in the past, that in order to hit your long-term FFO goals, right? So we're moving, we're not talking about 25 now. The price has to be part of the mix to achieve your long-term goals. And I could be wrong. I might be misremembering, but it felt like you went a long time, like a decade or something, without taking overt price increases. And then you took price increases when inflation was really high. Correct me if I'm misremembering.
No, you got it.
Okay. So this feels different to me now that you're saying, hey, whether inflation is running 6% or 8% or 3% or 2%, price is part of the calculus.
Yeah. Let me say it a couple of different ways.
Okay.
First of all, as you know, we're tethered to GDP. So you kind of start with what you think GDP is going to be. And if our team does what we should do, we should slightly beat GDP. All right. So we'll kind of start there. Last year's GDP was in the 2.78%, whatever it was, and we came in at 4.2%. It's a good year, right? We are at what I call peak occupancy. So to get what we're going to get in terms of top line pro forma revenue growth, it pretty much has to be rate. And you nailed it with your comment about inflation. Inflation is our friend. And when we had inflation in 2022, we were up double digits on the top, and it was primarily rate. Now, the decade between the Great Recession and COVID, we lived in a 2% world.
Keep in mind, we've been around for 120 years. We have a lot of long-term tenants that have been with us forever. You know, if we're in a 2% world and there's no expectation of inflation, you know, that renewal discussion becomes 2% or 3%. It just does, right? Not that we're in a 2% world now, but I don't quite know what world we're in right now in terms of, you know, what to expect in inflation. I can tell you in the broader economy, there's not the kind of expectation for inflation that we were experiencing in, you know, in the 2022, early 2023 time horizon. It's just, it's not like that.
Okay. Well, you're not alone. I mean, I think the 10-year in the last month went from four to four one something, so.
You know, the flip side of the equation is our business experienced inflation back then, and it's not now. We have no inflation pressure on our expense base.
Okay. Can I shift gears and talk about the ERP investments you're making? Because I know you've been working on that for a couple of years. I think you said that those investments, maybe I'm misremembering, mostly done or done by the third quarter of this year. Is that right? And then the savings will really kick in for 2026. Is that?
Yeah. Let's call it done in the Q1 of 2026.
Okay. All right.
I now know why CEOs don't like to do this. These things are tough. We're done with phase one. Phase one was mostly financial reporting, accounting, control. Phase two, which we're just launching now, touches a lot of operational aspects of our business, primarily the sales function from first client contact to billing. And you know, we're going to be an Oracle shop with Salesforce sandwiched in between for our account executives. To your question, the benefit, let's call it, I'll be disappointed if in 2027, it's not a full point of margin expansion. So like I said, I will be disappointed if we don't do 48% margins in 2027.
Okay. And then on top of that, I guess you're already doing sort of record margins now with the ERP investment.
Yeah.
So do you mind just sort of teasing that apart about how much of that is investments, the ERP investments that you're making now that go away versus incremental costs that you can take out of the business?
There's some truth to the benefits happening now.
Okay.
Just less paper flying around our office.
Okay.
You know, the ability to not charge for, we charge for credit card stuff that we couldn't do before. And that's a little margin enhancement. But bigger picture, what affects our margins? The incremental margins from digital, as I mentioned, can be 65%-70%. So the more digital we put out, by definition, our margins tick up. And you've seen that over the last three years since COVID, you know, from like, you know, high 45% to where we are now, high 46%, almost 47%. To the extent we do tuck-in acquisitions, that's margin enhancing. Because tuck-ins come in at 60%-65% incremental margin contribution. Again, sort of by definition, your overall margin is going to tick up. And then, you know, staying away from low-margin businesses like transit is helpful as well.
Understood. Okay. That's great. We have about a minute and a half left, and I would just love it. Let me give you, I just want to talk about Vistar for a second, and I'm going to just do a quick sort of my dummy explanation of what this is. Correct me if I'm wrong, and what I really care about is for you to paint the bull case for what this could mean for the category and for Lamar, so I think of Vistar sort of sitting in the middle. You have a bunch of advertisers on the demand side that will send their dollars into platforms like Vistar. On the supply side, you have a lot of digital inventory where that advertising could be placed.
Correct.
T-Mobile just bought this.
Correct.
It's not yet closed, but they just bought it.
Oh, it is closed.
Oh, it's closed. Okay.
It's closed. We invested $30 million in Vistar, got a 20% interest about three or four years ago, and we just got a $130 million valuation on that.
Okay.
So yeah, good deal.
Okay. What is the blue sky case for what it could mean? Because I look at it at one level, I'm like, what is a mobile carrier buying this asset?
Yeah. So here's what's important to know. There are third-party data providers out there that are useful for us to do measurement and prove out campaigns with. Those third parties buy their data from the telcos. So we now have the primary source of data highly vested in the industry. And T-Mobile wants to monetize their data in a way that goes directly to the customer, which happens to be us and our customers. So in that sense, it makes a great deal of sense. They're also a great marketer. They're an entrepreneurial company. They love out-of-home, and they own some out-of-home. They actually are in the business.
Session will begin in 10 minutes.
So yeah, nothing but good for the industry.
That's great. And can I just ask one last one while the music goes?
Sure.
The proceeds from the sale, the gain.
Yes.
Does that impact your AFFO at all? Is there no?
No.
Okay.
No impact on the guide. And it's going to result in give or take a 15%-20%, $0.20 special dividend to our distribution. Yep. Thank you, guys.
Thank you.
Appreciate it.