Lamar’s REIT will likely come to market before CBS’. The latter’s announcement stated that 2014 will likely be the earliest it can convert its billboards to a REIT. The market reception of Lamar’s REIT will be interesting to watch, since CBS is likely to see a similar market response.
How to Think About A Billboard REIT
Unlike casinos, the billboard industry is largely fragmented. True, there are at least a half dozen major participants, but after the large companies, there are hundreds of smaller players owning as little as one billboard. Leases can be month to month or for much longer periods, with one-year leases a common period for better situated properties. In some ways this is similar in nature to the apartment area. The fragmentation, however, provides room for acquisition based growth, which is a long-term positive.
Unlike apartments, however, results in the billboard REIT space will be heavily impacted by economic cycles. Indeed, with a mixture of national advertising and local advertising, a weak economy could be a particular drag on results. Big advertisers might pull back from second tier locations, while local adverting could dry up altogether. Thus, investors need to keep a keen eye on economic activity.
Regional exposure could also be an issue, though Lamar and CBS both have broad exposure. That said, if certain areas of the United States were to be suffering more than others, billboard occupancy and lease rates in those areas could come under pressure. This is one to watch if smaller, less geographically diversified billboard REITs come to market.
Costs should be manageable and relatively steady. In many cases, a billboard space is leased by the billboard company for long periods and resold to advertisers for shorter periods. Upkeep is usually fairly negligible, since there isn’t nearly much to maintain on a billboard as there is on a property that is used or occupied in some way. The billboard company’s lease costs should be watched, to ensure that increases don’t outstrip the company’s ability to raise lease rates with its customers.
A notable negative, however, is that lease rates are based on supply and demand, and on competing advertising channels. While billboards in high demand areas will likely have stable to increasing lease rates (think Times Square in New York City), less desirable locations will probably see rates fluctuate a lot more. This could make the top line, and dividends, more variable than other property types. It could also lead these companies to maintain dividend levels at the lowest possible legal level (90% of earnings).
Billboard REITs Worth a Look
At the end of the day, Lamar and CBS are probably making a good decision by converting their billboards to REITs. Although neither will consummate these plans soon, investors should keep an eye on their progression. This could be the start of a new industry going through a REIT conversion wave.
Yours,
The article More REIT Conversions: Billboards originally appeared on Fool.com and is written by Reuben Gregg Brewer.
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