Lamar(LAMR) - 2019 Q4 - Annual Report

PART I Business Lamar Advertising is a leading outdoor advertising company in the United States, operating since 1902, focusing on leasing advertising space on billboards, logo signs, and transit displays General Overview Lamar Advertising is one of the largest outdoor advertising companies in the U.S., providing fully integrated services from ad production to maintenance Advertising Display Portfolio (as of Dec 31, 2019) | Display Type | Count | | :--- | :--- | | Billboard Advertising Displays | ~157,800 | | Digital Billboard Displays | >3,500 | | Logo Sign Advertising Displays | >151,200 | | Transit Advertising Displays | >52,800 | Corporate History Founded in 1902, Lamar has been publicly traded since 1996 and reorganized in 2014 to qualify as a Real Estate Investment Trust (REIT) - The company reorganized its business operations to qualify as a REIT for the taxable year ended December 31, 2014[19] Operating Strategies The company's operating strategy emphasizes high-quality local sales, centralized control with decentralized management, internal growth, and reinvestment in digital technology - Local advertising constituted approximately 76% of net revenues for the year ended December 31, 2019[21] - The company invested approximately $1.1 billion in capital expenditures since January 1, 2009, for upgrading existing displays and constructing new ones[24] - In fiscal year 2019, total capital expenditures were approximately $141.0 million, with $57.5 million dedicated to digital technology[26] Capital Allocation Strategy Lamar's capital allocation strategy aims to increase adjusted funds from operations (AFFO) and return on invested capital, prioritizing reinvestment and strategic acquisitions after meeting REIT distribution requirements - In 2019, the company generated $630.7 million in cash from operating activities, used to fund capital expenditures, dividends, and acquisitions[27] Company Operations The company's operations are primarily divided into billboards, logo signs, and transit advertising, with billboards being the largest segment - Billboard advertising revenue in 2019 was comprised of approximately 75% from bulletin rentals and 25% from poster rentals[29] - As of December 31, 2019, the company's 3,500+ digital billboards generated approximately 25% of total billboard advertising net revenue[34] - Lamar is the largest provider of logo sign services in the U.S., operating 24 of the 26 privatized state logo contracts[37] Competition The outdoor advertising industry is fragmented, with Lamar competing against other large outdoor providers and various other media forms - Competitors include large outdoor providers, broadcast and print media, and a growing variety of other out-of-home advertising media in locations like shopping centers, airports, and stadiums[50] Total Revenue by Advertising Type (Year Ended Dec 31, 2019) | Advertising Type | Revenue (in millions) | | :--- | :--- | | Static Billboard | $1,145.4 | | Digital Billboard | $392.1 | | Transit | $131.9 | | Logo | $84.2 | | Total | $1,753.6 | Advertising Tenants Lamar has a diverse tenant base across various industries, with no individual tenant representing more than 2.0% of billboard advertising net revenues Top Billboard Advertising Categories by Revenue (2019) | Category | Percentage of Net Billboard Advertising Revenues | | :--- | :--- | | Service | 14% | | Health Care | 11% | | Restaurants | 11% | | Retailers | 9% | | Amusement/Entertainment/Sports | 7% | | Automotive | 5% | | Financial | 4% | | Gaming | 4% | | Education | 4% | | Insurance | 4% | Regulation The outdoor advertising industry is subject to significant federal, state, and local regulations, which restrict display characteristics and act as a barrier to entry - Federal law, primarily the Highway Beautification Act of 1965 (HBA), regulates outdoor advertising on major highways and requires states to implement control programs[56] - The expansion of digital billboards may face new or revised regulations due to concerns over aesthetics or driver safety, which could materially impact the business[59][60] Real Estate Portfolio The company's real estate portfolio includes both owned and leased properties, with a significant portion of leases expiring or subject to renewal in the next five years Owned vs. Leased Billboard Sites (as of Dec 31, 2019) | Site Type | Count | | :--- | :--- | | Leased Sites | >74,300 | | Owned Sites | >8,900 | - Approximately 69% of leases will expire or be subject to renewal in the next 5 years[63] Seasonality The company's revenues and operating results are subject to seasonality, with financial performance typically weakest in the first quarter - The company typically experiences its weakest financial performance in the first quarter of the calendar year[70] Risk Factors The company faces various risks, including substantial debt, operational challenges, intense competition, extensive regulations, and complexities related to its REIT status Financial Risks The company's substantial debt, approximately $2.98 billion as of December 31, 2019, poses significant risks by limiting cash flow and increasing vulnerability to economic downturns - As of December 31, 2019, Lamar Media had approximately $2.98 billion of total debt outstanding[72] - Debt agreements restrict the company's ability to incur more debt, dispose of assets, create liens, make investments, and pay dividends[75] Operational and Strategic Risks Revenues are sensitive to economic downturns, and the company's growth strategy through acquisitions faces challenges in integration and a dwindling pool of suitable candidates - In 2019, the company completed acquisitions for a total cash purchase price of approximately $226.3 million[81] - The company faces competition from larger outdoor advertisers like Clear Channel and Outfront Media, as well as other media such as television, radio, and the internet[86][87] Regulatory and Legal Risks The business is heavily impacted by governmental regulations, particularly the Highway Beautification Act of 1965, and evolving rules for digital billboards could affect deployment strategy - Governmental regulations, including the Highway Beautification Act of 1965, pose a significant barrier to entry and expansion in many markets[88] - Four of the company's 25 logo sign contracts were subject to renewal or expiration in 2020[94] REIT and Tax Risks Failure to maintain REIT qualification would result in significant adverse tax consequences, requiring the company to distribute at least 90% of its REIT taxable income annually - If Lamar fails to qualify as a REIT, it would be subject to corporate income tax and could not re-elect REIT status for four years[98] - As a REIT, Lamar must distribute at least 90% of its REIT taxable income to stockholders annually[102] Properties The company's headquarters is in Baton Rouge, Louisiana, operating 126 owned and 130 leased facilities, alongside over 8,900 owned and 74,300 leased outdoor advertising sites Property Portfolio Summary (2019) | Property Type | Details | | :--- | :--- | | Owned Operating Facilities | 126 | | Leased Operating Facilities | 130 (Annual lease expense: ~$8.3M) | | Owned Outdoor Sites | >8,900 parcels | | Leased Outdoor Sites | >74,300 sites (Annual lease expense: ~$287.6M) | PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Lamar's Class A common stock trades on NASDAQ under "LAMR", while Class B is privately held by the Reilly family, and as a REIT, the company must distribute at least 90% of its taxable income annually - The company's Class A common stock is listed on the NASDAQ Global Select Market under the symbol "LAMR"[123] Selected Financial Data This section presents selected consolidated financial data for Lamar Advertising Company for the five years ended December 31, 2019, showing consistent growth in net revenues and cash flows Selected Financial Data (2017-2019) | Metric (in thousands) | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Net revenues | $1,753,644 | $1,627,222 | $1,541,260 | | Operating income | $517,741 | $460,556 | $455,367 | | Net income | $372,111 | $305,232 | $317,676 | | Cash flows from operating activities | $630,865 | $564,846 | $507,016 | | Total assets | $5,941,155 | $4,544,641 | $4,214,345 | | Total debt | $2,980,118 | $2,888,688 | $2,556,690 | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) This section provides management's perspective on the company's financial condition and results of operations, highlighting revenue growth, net income increase, and liquidity management for 2019 Overview The company's revenue, primarily from renting advertising space, is sensitive to economic conditions, with growth driven by occupancy, rates, and strategic acquisitions Capital Expenditures (in thousands) | Category | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Billboard — Traditional | $48,194 | $37,905 | $36,015 | | Billboard — Digital | $57,519 | $45,938 | $40,218 | | Logos | $10,762 | $11,438 | $9,614 | | Transit | $2,308 | $5,364 | $2,863 | | Land and buildings | $13,453 | $8,420 | $13,690 | | PP&E | $8,720 | $8,573 | $6,929 | | Total | $140,956 | $117,638 | $109,329 | Results of Operations: 2019 vs. 2018 In 2019, net revenues increased 7.8% to $1.75 billion, driven by acquisitions and digital billboard growth, leading to significant increases in operating income, net income, Adjusted EBITDA, and AFFO Financial Performance Comparison: 2019 vs. 2018 (in millions) | Metric | 2019 | 2018 | % Change | | :--- | :--- | :--- | :--- | | Net Revenues | $1,753.6 | $1,627.2 | 7.8% | | Operating Income | $517.7 | $460.6 | 12.4% | | Net Income | $372.1 | $305.2 | 21.9% | | Adjusted EBITDA | $784.9 | $722.5 | 8.6% | | AFFO | $581.4 | $544.5 | 6.8% | - Acquisition-adjusted net revenue increased by $45.7 million, or 2.7%, in 2019 compared to 2018[146] Results of Operations: 2018 vs. 2017 In 2018, net revenues increased 5.6% to $1.627 billion, with operating income showing modest growth, while net income decreased due to a debt extinguishment loss, despite strong non-GAAP metric performance Financial Performance Comparison: 2018 vs. 2017 (in millions) | Metric | 2018 | 2017 | % Change | | :--- | :--- | :--- | :--- | | Net Revenues | $1,627.2 | $1,541.3 | 5.6% | | Operating Income | $460.6 | $455.4 | 1.1% | | Net Income | $305.2 | $317.7 | (3.9)% | | Adjusted EBITDA | $722.5 | $671.4 | 7.6% | | AFFO | $544.5 | $496.3 | 9.7% | - The decrease in net income in 2018 was largely due to a $15.4 million loss on debt extinguishment related to the prepayment of Senior Subordinated Notes[166] Liquidity and Capital Resources The company maintains liquidity through cash from operations and its senior credit facility, with total liquidity at $413.5 million as of December 31, 2019, and actively manages its debt through refinancing - As of December 31, 2019, total liquidity was approximately $413.5 million, comprising $26.2 million in cash and $387.3 million available under the revolving credit facility[176] - In February 2020, the company completed a refinancing that increased the revolving credit facility capacity by $200.0 million and issued $1.0 billion in new senior notes[176][188] Contractual Obligations (as of Dec 31, 2019, in millions) | Obligation | Total | Less Than 1 Year | 1 - 3 Years | 3 - 5 Years | After 5 Years | | :--- | :--- | :--- | :--- | :--- | :--- | | Long-Term Debt | $2,980.1 | $226.5 | $490.6 | $1,053.3 | $1,209.7 | | Interest obligations | $614.0 | $144.9 | $265.2 | $158.1 | $45.8 | | Operating leases | $1,786.6 | $261.1 | $405.4 | $317.9 | $802.2 | | Total | $5,380.7 | $632.5 | $1,161.2 | $1,529.3 | $2,057.7 | Critical Accounting Estimates The company's financial statements rely on critical accounting estimates involving judgment, including goodwill impairment testing, asset retirement obligations, business combination fair value allocation, and lease accounting under ASC 842 - Goodwill impairment was tested on December 31, 2019, for two reporting units (Logo and Billboard operations), and no impairment charge was required[218][219] - The asset retirement obligation, valued at $226.1 million as of December 31, 2019, is based on the estimated present value of costs to dismantle and remove billboard structures from leased land[220] - The adoption of ASC 842 on January 1, 2019, resulted in recording operating lease liabilities of $1.265 billion and right-of-use assets of $1.321 billion[224] Quantitative and Qualitative Disclosures About Market Risk The company is primarily exposed to interest rate risk from its variable rate debt, with approximately $1.292 billion at variable rates as of December 31, 2019, and mitigates this risk through a balance of fixed and variable rate debt - At December 31, 2019, approximately $1.292 billion (46.9%) of the company's long-term debt bore interest at variable rates[266] - A hypothetical 200 basis point increase in interest rates would have increased 2019 interest expense by an estimated $26.8 million[266] Financial Statements This section contains the consolidated financial statements for Lamar Advertising Company and its subsidiary for the fiscal year ended December 31, 2019, along with the unqualified auditor's report and critical audit matters - The independent auditor, KPMG LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting[275][281] - Critical Audit Matters identified by the auditor were the assessment of the accounting lease term for billboard land leases and the valuation of the site locations intangible asset from the Fairway Outdoor Advertising acquisition[289][292] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2019, with no material changes to internal controls identified - Management concluded that as of December 31, 2019, the company's disclosure controls and procedures were effective[569] PART III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's 2020 Proxy Statement - The detailed information for this item is incorporated by reference from the forthcoming 2020 Proxy Statement[577] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's 2020 Proxy Statement - The detailed information for this item is incorporated by reference from the forthcoming 2020 Proxy Statement[579] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership of certain beneficial owners and management is incorporated by reference from the company's 2020 Proxy Statement - The detailed information for this item is incorporated by reference from the forthcoming 2020 Proxy Statement[580] Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the company's 2020 Proxy Statement - The detailed information for this item is incorporated by reference from the forthcoming 2020 Proxy Statement[581] Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the company's 2020 Proxy Statement - The detailed information for this item is incorporated by reference from the forthcoming 2020 Proxy Statement[582] PART IV Exhibits, Financial Statement Schedules This section lists the financial statements, financial statement schedules, and exhibits filed as part of the annual report, with detailed indexes provided - This item references the financial statements and schedules found in Item 8 and the Exhibit Index[583][584][585]