This article is republished with permission from REITCafe.
This week, the Outdoor Advertising Association of America reported that out-of-home advertising revenues rose 4.2 percent to $3.84 billion during the first half of 2015 compared with year-ago levels. The second quarter of 2015 was the 21st consecutive quarter of year-over-year growth in ad revenues. Two of the four major outdoor advertising companies converted to real estate investment trusts (REITs) in 2014, prompting a look at outdoor advertising trends and REIT performance.
The movement toward highly flexible digital billboards is driving outdoor advertising revenue growth. The ability to rotate ads among multiple advertisers allows owners to achieve five to eight times the revenue of traditional billboards. Further enhancing revenue, Lamar Advertising (LAMR) has developed the ability to combine digital billboards with geo-fencing to send mobile ads to consumers who are in proximity to a billboard, event venue, or retail location.
| TREPP-i Survey Loan Spreads (50–59% LTV)* |
| This Week | Previous Week | Previous Month | End 2014 | End 2013 | |
| Industrial | 158 | 149 | 139 | 138.5 | 170 |
| Multifamily | 154 | 146 | 141 | 139.8 | 166.7 |
| Office | 165 | 158 | 145 | 148 | 175 |
| Retail | 158 | 150 | 141 | 139.8 | 175 |
| Average Spread | 158.75 | 150.75 | 141.5 | 141.5 | 171.7 |
| 10-year Treasury Yield** | 2.05 | 2.20 | 2.25 | 2.17 | 3.04 |
Year-to-date performance for the two outdoor advertising REITs has been mixed. Lamar Advertising is the larger of the two outdoor advertising REITs, with a market cap of about $5.5 billion. Its stock price is up almost 7 percent year-to-date during 2015. Second-quarter funds from operations (FFO) beat consensus estimates and was ahead of year-ago levels. Management attributed performance to sales growth and control over operating expenses.
Outfront Media (OUT), formerly CBS Outdoor Americas, has a market cap of $3.2 billion. Its stock price gained almost 15 percent during the first quarter of 2015, but has moved down since March, and is now down 11 percent for the year. During the second quarter, the company missed consensus estimates, due in part to weakness in its billboard segment, as well as currency fluctuations that affected its international portfolio. Its transit business is performing well, and it recently won a one-year extension of its New York City subway advertising contract. OUT recently announced plans to lease physical space on billboard structures to wireless carriers to locate transmission equipment to their cellular networks.
Increasing regulations limit REITs’ ability to grow organically through the addition of new billboards. The Highway Beautification Act of 1965 enacted controls on outdoor advertising and limited the size and placement of billboards. In May 2012, the U.S. government expanded the reach of the Highway Beautification Act to include “urban principal arterial routes.” Vermont, Maine, Hawaii, and Alaska currently prohibit billboards, and Rhode Island and Oregon do not permit new billboards. Numerous cities around the country also have ordinances prohibiting new billboards. In Dallas, which prohibits new billboards, one new digital billboard is allowed for every three old billboards that are removed.
Regulations that limit new billboards benefit owners by making existing signs more valuable. Nevertheless, stricter industry regulation and the movement to ban outdoor advertising are industry concerns.
The billboard industry is consolidating. Large owners are expanding through acquisitions, which enable them to offer advertisers more locations and to reduce expenses by achieving economies of scale. The two REITs, together with Clear Channel Outdoor Holdings and France’s J.C. Decaux, control more than half of the U.S. outdoor ad market. In 2014, Outfront Media spent $690 million to acquire Van Wagner Communications with 1,100 billboards in 11 top U.S. markets. Earlier this year, GTCR and Adams Outdoor Advertising partnered to purchase Fairway Media Group, one of the largest outdoor advertising companies in the United States. Clear Channel Outdoor Holdings was considering a sale of its European assets early this year, but put it off because of the weakness of the euro. Finally, J.C. Decaux has indicated interest in expanding its U.S. presence through the acquisition of Outfront Media, although no offer has been publicly announced.
Outdoor advertising REITs offer strong dividend yields that exceed the FTSE NAREIT All Equity REIT average, making them attractive to investors. However, REIT performance is mixed, and the sector faces obstacles to growth that should make investors cautious.
* TREPP-i Survey Loan Spreads levels are based on a survey of balance sheet lenders. For more information, visit Trepp.com.
** - 10 yr. Treasury Yield as of 08/21/2015.
