Billboard Firms Adams, Fairway Consider REIT Conversion, Merger
(Bloomberg) -- REIT investors may soon have a new billboard company to bet on.
Adams Outdoor Advertising and Fairway Outdoor Advertising are in the preliminary stages of exploring conversion to the real estate investment trust structure, Kevin Gleason, chief executive officer of both closely held companies, said in an interview. Fairway has been majority-owned by Chicago-based private equity firm GTCR LLC since 2015.
The evaluation is being driven by “both tax and valuation purposes,” Gleason said. REITs don’t pay federal taxes as long as they distribute at least 90 percent of their earnings as dividends, and the Internal Revenue Service has been willing to qualify rent from outdoor displays as income from real property, a necessity for REIT status. Separately, PricewaterhouseCoopers LLP has said companies facing a burden from interest-deductibility limits imposed by the new tax laws may be swayed to convert to the REIT status, in part because that limit is removed and interest becomes an entirely deductible rental expense.
Beyond REIT conversion, Gleason added that “everything is under consideration.” That includes a potential merger of Adams and Fairway, which would create the fourth-largest U.S. billboard company and a more sizable competitor to Lamar Advertising Co. and Outfront Media Inc., a REIT spun off from CBS Corp. in 2014. An initial public offering of a combined Adams and Fairway could follow, he said. The two companies, both based in Roswell, Georgia, have outstanding debt of roughly $750 million, according to data compiled by Bloomberg.
Another company in the same industry, Clear Channel Outdoor Holdings Inc., may also provide REIT investors with a new alternative. On an earnings call earlier this month, Brian Coleman, the company’s treasurer, said it would be “desirous” to separate the company’s U.S. business in a way that would give it flexibility to become a REIT in the future.
Lamar trades at a premium to rivals Clear Channel Outdoor and France’s JCDecaux SA, which aren’t structured as REITs.
Still, “outdoor media REITs are still being under-appreciated by investors who don’t seem to fully recognize the stability and reliability of the cash flows,” said Stephen McNeely, a managing partner of Tantara Capital Partners and a director of Fairway. The sector trades at a discount to REITs that are currently favored by investors, such as those that operate data centers and communications towers.
Nevertheless, analysts are generally bullish on outdoor advertising. In a note to clients last month, Barrington Research Associates Inc. analysts led by James Goss said the medium “does not face the same pressure as television advertising in terms of viewer reach.” A shift to digital billboards and digital displays on transit systems has provided growth opportunities, the analysts said.
New REITs may sprout from industries other than outdoor advertising, according to Tim Bodner, real estate deals leader at PricewaterhouseCoopers. “We’re continuing to see auto dealers, retailers, technology, gaming and health-care-related companies with substantive portfolios of real estate evaluate whether they should pursue a REIT creation,” he said.
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