The Billboard Insider Podcast
00:05:18 · Dave Westburg, John Weller
[00:05:18] S0: So that's the upside. How about the risks? [00:05:22] S1: Well, like any business, there are some risks. And you know, the most obvious ones are the cancellation of the lease, where obviously that can be a significant issue for an operator and also for a lender as they look at it. Interest rate risk, and that's something that's becoming a little more prevalent as the Federal Reserve has raised their rates over the last year or so. And as those interest rates increase, it makes it more difficult to service debt. Regulatory risk is one, and obviously think just the other day, or it might've been yesterday or today, we published an article on it's the Thomas case, right Dave? That's Correct. Yeah, that's just been heard. And that's a significant regulatory case that may have impact on our industry. So as a lender, we're watching that closely. [00:06:12] S0: Well, just a little aside, the Thomas case, if Thomas wins, it could potentially moot an entire regulatory apparatus for out of home, which includes just compensation protection, validation of permits, and you could open the way to a much more stringent and draconian form of regulation. My sort of view of Thomas is better the devil you know than the devil you don't, and system works the way it is, and I'd probably prefer it not get overthrown.
00:06:12 · Dave Westburg, John Weller
[00:06:12] S0: Well, just a little aside, the Thomas case, if Thomas wins, it could potentially moot an entire regulatory apparatus for out of home, which includes just compensation protection, validation of permits, and you could open the way to a much more stringent and draconian form of regulation. My sort of view of Thomas is better the devil you know than the devil you don't, and system works the way it is, and I'd probably prefer it not get overthrown. [00:06:42] S1: As this case goes on, I mean, one of the strengths of the industry that I didn't mention earlier is that we're fortunate that we have such a strong national organization that lobbies and and deals with legal issues like the Outdoor Advertising Association of America. Actually, the Out of Home Advertising Association of America. Yes. As they just had a name change. Some other things that we look at from a lending standpoint are build risks. You know, just because you have a permit doesn't necessarily mean it's a good board to build. You know, it's an understanding of picking a quality site and also, understanding how to market that site to maximize the value out of it. It also is part of the build risk. It's you get good quality lease terms as part of that. And then the other thing that we're concerned to us is potential for general market downturns. You know, those tend to affect all industries, but obviously that has some impact on revenues. And we wanna feel as a lender that we're working with operators who understand what changes are necessary to make if you get into a down market.
00:07:49 · Dave Westburg
[00:07:49] S0: And you clearly can see in a down market, out of home is cyclical. I think I looked at the last three recessions and out of home is sort of three X the economy. So if the economy goes down a percent, out of home goes down 3%. It was down 3% in the nineteen ninety two recession, it was down a percent after the two thousand and one nineeleven event, and it was down almost 20% in the great recession of two thousand and nine. John, where are you seeing demand from out of home advertisers for loans right now?
00:08:22 · John Weller, Dave Westburg
[00:08:22] S1: Well, that's an easy one. I mean, I'd say number one on the list are digital sign conversions. You know, we have a lot of smaller operators as well as large operators who have great locations that they're looking to upgrade to digital. And as they get their permitting issues taken care of and ordinance issues with cities, we've had a lot of operators who've come to us to help them to finance taking one of their best static signs and converting it to digital. As a lot of us know, this has been a very active acquisition market and not only with some of the larger outdoor operators, but also smaller ones too. And so we've come alongside several outdoor companies who've looked to do small add on acquisitions that are a good strategic fit for their business. And we've been involved in those situations. And then of course it's just general growth. Sometimes the best value you can create for a sign is when you can identify your own site, get it permitted and construct it yourself. And typically we work with our existing customers to help them with maybe some add ons to their existing line to help them as they're looking at new builds. [00:09:29] S0: John, what determines the debt capacity of an out of home advertising company? In other words, if I own an out of home advertising company, I wanna grow, I wanna borrow some money from my lender, what is a reasonable debt limit?
00:09:29 · Dave Westburg, John Weller
[00:09:29] S0: John, what determines the debt capacity of an out of home advertising company? In other words, if I own an out of home advertising company, I wanna grow, I wanna borrow some money from my lender, what is a reasonable debt limit? [00:09:42] S1: From a lending standpoint, we look at a ratio commonly known as debt to cash flow or debt to EBITDA. EBITDA, as most people know, is twelve months earnings before interest, depreciation, taxes, and amortization. There's my CPA in me from my old days of having to deal with acronyms. But, you know, commonly, I guess I would refer to that level of income as operating income, what it takes to truly run your business on a on a day to day basis. And when we look at debt to cash flow, we have kind of an upper limit of five to one. We found that that level makes sense because it's an amount where the debt can be repaid in a reasonable time frame without significant revenue growth and also debt service is low enough that the operator can have excess cash flow to spend on CapEx to keep growing. [00:10:30] S0: You never want to count on a hockey stick to get you repaid. [00:10:35] S1: One of the great myths I think a lot of operators run into is, you know, they'll look at a plant and say, well, I can bump up revenue significantly in this plant. And sometimes they can, but the reality a lot of times is it's a lot more difficult than most people realize when they get into it.
00:10:35 · John Weller, Dave Westburg
[00:10:35] S1: One of the great myths I think a lot of operators run into is, you know, they'll look at a plant and say, well, I can bump up revenue significantly in this plant. And sometimes they can, but the reality a lot of times is it's a lot more difficult than most people realize when they get into it. [00:10:52] S0: Let's stop here to pay the bills. Few things are more frustrating than having to educate your bank around the out of home advertising business. Billboardloans.com has lent money to small out of home advertising companies for twenty two years, so we won't waste your time with stupid questions. We understand the billboard business is cyclical and won't bail out on you in bad times. Some of our best relationships were forged during the 2001 and two thousand nine recessions. Talk to our borrowers. Billboardloans.com, fast, smart, committed. John, what's one thing borrowers don't think about that they should?