Which Companies Want to Join the REIT Club?

Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Investors scored some big gains in 2012 on companies that switched their form of organization from corporation to real estate investment trust (REIT).  A diverse group of companies pursued the REIT path in 2012, from data center owners to prison operators.  Of course, the primary benefit is the pass-through tax treatment of the REIT status, as long as the company pays out at least 90% of its taxable income.  As expected, REITs pay out higher dividends than the typical corporation, leading to rising popularity from rate-starved income investors.  So, which companies are prime candidates to join the sector?

CBS (NYSE: CBS)

Like most media conglomerates, CBS has a diverse revenue mix, including its CBS television network, films, publishing, and various online businesses.  The company also owns one of the leading outdoor advertising networks, with billboard assets in 100 markets throughout North America. 

While sales growth has been hard to come by over the past five years, CBS’ profitability hit a five-year high in 2012 as the company continued restructuring its business units and simplifying its corporate structure.

In FY2012, CBS grew its business modestly, with increases in revenues and operating income of 3.3% and 13.9%, respectively, versus the prior year.  While the sale of advertising on its flagship network is the company’s primary business, CBS achieved better sales growth in the areas of content distribution and programming subscriptions.  CBS’ premium cable services continue to grow their subscriber bases, with the company’s Showtime and CBS Sports networks reporting 76 million and 46 million subscribers, respectively, as of December 2012.

CBS’ future lies in the distribution of its content through both old and new outlets.  Over the past few months, the company has inked profitable licensing agreements with the leading video-on-demand providers, as well as launching the CBS Sports Radio Network.  CBS also initiated the process of setting up a REIT for its domestic outdoor assets.  If all goes according to plan, the outdoor segment should complete its conversion at the beginning of 2014.

Lamar Advertising (NASDAQ: LAMR)

Founded in 1908, Lamar is the nation’s leading outdoor advertising company with a portfolio of roughly 155,000 billboards around the country.  Despite its industry leadership, the company continues to acquire smaller operators, including over $200 million of acquisitions in 2012.  In addition, Lamar is increasingly adding high-tech features to its business, with an increasing percentage of digital and rotating billboards.

In FY2012, the company reported improved financial results, with increases in revenues and operating income of 3.8% and 9.5%, respectively, compared to the prior-year period.  Lamar achieved growth across all of its business units, with the largest gain achieved in its municipal transit segment.  The company’s operating profitability also improved notably, as average pricing benefited from a pickup in general economic activity.  While Lamar’s management hasn’t made a decision on a REIT election, it is a good bet once CBS’ conversion goes through.

Brookdale Senior Living (NYSE: BKD)

With 647 communities and over 66,000 living units in 36 states, Brookdale is one of the largest operators of senior housing facilities.  The company has grown primarily through acquisitions in recent years, including the purchases of American Retirement in 2006 and Horizon Bay in 2011.  Brookdale also has a growing ancillary services segment, which offers physical therapy, occupational therapy, home health, and other related services.

In FY2012, the company reported increases in revenues and adjusted operating income of 12.7% and 1.8%, respectively, versus the prior year.  While Brookdale’s average occupancy across its portfolio remained very strong at roughly 88%, the company’s operating margin was impacted by average pricing declines at its continuing care retirement communities.  Many of the residents at these facilities receive skilled nursing services that have been subject to reimbursement declines due to Medicare’s funding problems.

Even though the company hasn’t announced any REIT conversion ideas, it would be a natural progression for the company’s business and likely provide lower cost funds.  Due to changes in federal laws that have eased restrictions on REITs’ activities, many of the big health care investment trusts are moving into the operations business, including major players like Health Care REIT and Ventas.  Brookdale will probably need to convert to REIT status if they want to keep pace with these acquisition-minded, larger competitors.

The bottom line

The REIT sector has been a good place to invest, with relatively high dividend yields and the potential for a sizable one-time gain on a conversion announcement.  While only one of these companies has publicly announced their plans, all three are leaders in their respective industries and are likely to make the switch at some point in the future.  They are definitely worth watching.


rghanley has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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