OUTFRONT Media Inc (OUT)

[Enterprising Investor]

CBS Outdoor and Lamar Need a New Audience (6/24/14)

Billboard companies are doing a lot of self-advertising these days.

The owners of roadside ad displays and bus-stop placards have long been the province of media investors. Now, two of the biggest players, Lamar Advertising and CBS Outdoor Americas, CBSO are becoming real-estate investment trusts, the latest examples of nontraditional properties doing so. Making the most of the switch means educating a new group of investors with different priorities. It may take a strong campaign to win them over.

REITs avoid paying taxes on U.S. income as long as they derive at least 75% of it from ownership and rental of real estate. Lamar and CBS Outdoor, which is in the process of splitting off from CBS, have both received approval to convert, although the exact timing still is unclear. Nonetheless, both have talked for more than a year about converting and already sport a REIT-like dividend yields of about 4.8% each, using estimates for 2014.

Yet they still trade at a discount to other REITs. Lamar's price is 12.8 times the low end of its 2014 guidance of adjusted funds from operations per share, a common REIT metric. That compares with average multiples north of 20 times for residential, self-storage and specialty (tower and data-center) REITs.

Lamar and CBS Outdoor aren't yet part of REIT indexes against which some funds benchmark performance. But there also are differences between their businesses and more traditional REITs that may give investors pause.

Unlike apartment REITs, billboard companies tend to own their structures but lease the land underneath them. Lamar and CBS Outdoor have substantial control over their leases, thanks to the Highway Beautification Act. Existing billboards are grandfathered in. If they were to remove them, however, no new structures could be built in their place in many cases. Cell-tower companies American Tower AMT +0.03% and Crown Castle International, CCI +0.38% which became REITs at the beginnings of 2012 and 2014, respectively, also tend not to own their land.

In addition, deals with advertisers last anywhere from 30 days to a year, versus seven to 10 years for a mall lease. This can leave billboard firms more exposed to cyclical fluctuations. Outdoor advertising revenue grew 8% a year between 2005 and 2007, but fell by 5% in 2008 and by 16% in 2009, says Wells Fargo. Revenue growth has averaged only 3% in the past four years.

Billboard maintenance spending can be quickly moderated during an economic downturn, though. Lamar reduced capital expenditure by 80% in 2009, allowing free cash flow to rise by 40% despite a 14% drop in revenue. Beyond a pickup in ad spending, Lamar and CBS Outdoor can grow by converting vinyl billboards to more lucrative digital signs and consolidating a highly fragmented industry.

Outdoor ad REITs may never achieve the heady valuations of their traditional property brethren. But with time and education, the benefits of REIT conversion should start to add up. Above all, in an environment of ultralow interest rates where yield is king, these companies certainly know what sells.

Write to Miriam Gottfried at [e-mail]

http://online.wsj.com/articles/heard-on-the-street-cbs-outdoor-and-lamar-need-a-new-audience-1403629686