Office, retail, residential and industrial real estate comprise the four major real estate investment trust (REIT) sectors. But many investors don’t realize that there are niche categories of REITs that specialize in real estate ranging from medical office buildings to timberland.

Below, I examine a specialty REIT that should appeal to income investors in search of high yields that are sustainable. This stock also conveys outsized growth potential as well.

Look beyond land…

Real estate is a broad realm that offers income-oriented investment opportunities beyond traditional residential and commercial real estate.

REIT are the rough equivalent of mutual funds for real estate holdings. In contrast to mutual funds, many REITs are not merely passive holders of their portfolio of properties; they are also involved in their operation.

REITs are structured as “pass-through” entities, which means that they avoid taxation at the corporate level as long as they distribute at least 90% of their profits to unitholders.

REIT distributions include components such as dividends derived from operating income, capital gains distributions from the sale of properties, and the return of capital.

As a result, REITs typically boast sizable yields. But it’s important to note that their favorable tax treatment at the corporate level means that the dividend portion of this distribution is subject to taxation as ordinary income.

Auspicious signs…

Here’s a specialty REIT worth considering: Lamar Advertising (NSDQ: LAMR).

Yes, advertising is increasingly digital, but a drive down any highway should show you that physical billboards remain in high demand.

With a market cap of $10.7 billion, Lamar is one of the biggest outdoor advertising companies in North America. Lamar operates more than 352,000 displays across the U.S. and Canada, offering national and local advertisers a wide range of billboard, interstate logo, transit and airport advertising formats.

Louisiana-based Lamar also offers its customers the largest network of digital billboards in the U.S., with about 3,800 displays.

According to Research and Markets, the global out-of-home advertising (ooh) market is expected to grow to $34.6 billion in 2026 (see chart).

Lamar sports a robust and solid dividend yield of 4.76%; analysts project that the company’s year-over-year earnings growth will hit 20.40% this year. Those numbers are testimony to Lamar’s market dominance and resilience, in light of the current economic slowdown and reduced ad expenditures.

On February 24, Lamar released impressive fourth-quarter and full-year operating results, with significant growth in the key metrics of earnings before interest, taxes, depreciation, and amortization (EBITDA), and adjusted funds from operations (AFFO). The highlights:

Fourth-Quarter 2022:

• Net revenue increased 8.3%.
• Adjusted EBITDA increased 9.4%.
• Diluted AFFO per share increased 7.3%.

Full-Year 2022:

• Net revenue increased 13.7%.
• Adjusted EBITDA increased 13.4%.
• Diluted AFFO per share increased 12.0%.

On the earnings conference call, Lamar chief executive Sean Reilly said:

“We delivered solid financial results for the fourth quarter, with strong local sales offsetting weakening demand from national customers. This allowed us to exceed the top end of our guidance range for full-year diluted AFFO per share. For 2023, we anticipate solid revenue growth and moderating expense growth.”

When the Federal Reserve finally pauses its interest rate tightening cycle, probably in mid-2023, cyclical companies such as Lamar should explode on the upside as economic activity and advertising spending picks up.

Real estate underperformed in 2022, but REITs generally perform well immediately following an economic downturn.

Lamar also offers a compelling growth proposition. Long-term Lamar shareholders have garnered a 58% share price rise over the last five years, surpassing the broader market return of about 40%.

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John Persinos is the editorial director of Investing Daily.

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