There have been a rash of companies converting all or part of their businesses to real estate investment trusts (REITs) in recent years. Some have made sense, others haven’t. CBS Corporation (NYSE:CBS)’s recent announcement that it is looking to turn its billboard business into a REIT is one that makes sense. But how should investors look at a billboard REIT?
REITs are a great asset class because they allow for the avoidance of corporate level taxes. While shareholders have to pay taxes on the income received at their normal tax rate, it avoids the onerous double taxation that regular dividends suffer. So, in the long run, a company that makes sense as a REIT is probably doing shareholders a favor by converting to one.
The first big REIT wave of recent years took place around paper companies. Companies with massive land holdings, which provided the primary input (trees) for their paper operations, realized that converting to or spinning off lumber REITs would be a good way to enhance shareholder value. Companies making this change included Potlatch Corporation (NASDAQ:PCH), Rayonier Inc. (NYSE:RYN), and Weyerhaeuser Company (NYSE:WY). They all joined Plum Creek Timber Co. Inc. (NYSE:PCL) as lumber REITs. Generally speaking, they have been well received.
Some companies, however, don’t make much sense as REITs. Take Penn National Gaming, Inc. (NASDAQ:PENN)’s plans to split itself into a gaming company and a REIT. Penn National owns and operates gaming and horse racing facilities with over 36,000 slot machines, 800 game tables, and nearly 3,000 hotel rooms.
Clearly, the company’s physical properties have material value. More so because many are in areas where building new casinos would be virtually impossible because of space constraints or legal and regulatory issues. Penn will remain the casino operator, but not the casino owner. However, how does a casino REIT grow if it’s hard or impossible to keep build casinos? Worse, does this conversion look too much like a way to avoid taxes and raise the ire of regulators?
Billboards Make Sense
Like the lumber REITs, billboard REITs make logical sense. Revenues are directly tied to the leasing of property and there are no notable negatives associated with billboards, except for the eyesore factor. So CBS looking to convert its billboards, which include such things as bus shelter signs and other similar signage, to a REIT should be a well-received move. As with most of the announced REIT conversions, CBS’ stock jumped on the news. Time will tell if the market’s positive view of virtually all such conversions makes sense.
CBS’ decision follows Lamar Advertising Co (NASDAQ:LAMR)’s move to the exact same thing with its billboards. With more than 140,000 billboards, Lamar will create a REIT that begins life with notable scale. However, it won’t have the scale of CBS’ billboard business, which tallies more than 400,000 U.S. billboards. Each, however, will be notable competitors in a fragmented industry.