The Billboard Insider Podcast
00:18:32 · Dave Westburg, Paul Wright
[00:18:32] S0: Which to me in this environment of online, that means setting up a Dropbox folder or another online folder where information is very easily accessible. [00:18:42] S1: Exactly. Those secure sites are are important. Then another one would be to go out and renegotiate any high rate leases. It's kind of like when you're buying a used car and or selling a used car and you're walking around and pointing out the dents and the dings and well, what about this and the tires? They need to be replaced. High lease rates are usually one of the key factors that we start to talk about when we're in the middle of a negotiation. And so they'll point out this site has a high lease rate, what are we gonna do about that, and do you think we can get that renegotiated? So that's one other item. And then finally, I would say... Well, two... A couple other things. One, we still have clients that are renting displays on a monthly basis instead of a four week period. And just converting that monthly ad contract to a four week period contract adds one period per year and can generate an additional 8% in revenue. So that's a selling point that you can either offer to a buyer or you can go out and start to convert those contracts before you take your signs to market. [00:19:56] S0: Mhmm.
00:19:56 · Dave Westburg, Paul Wright
[00:19:56] S0: Mhmm. [00:19:57] S1: And then finally, consolidating your footprint or expanding your footprint. And staying in your footprint isn't always the right idea, but if you want to grow organically and you want to maintain efficiencies, then look at your footprint. And are there stragglers? Are there signs that are outlying that you should sell? Or are there signs available to buy that would fit into your footprint nicely? So those are considerations that also kind of impact buying and selling decisions. [00:20:30] S0: Perfect. Now talk about how to value a billboard easement or a billboard lease. [00:20:38] S1: Billboard easements are the perpetual right, generally perpetual right, to go on a property and operate your sign. And so easements have three components. They have a utility easement, they have an access easement, and they have a visibility easement or area. And those things can be purchased in perpetuity. If there's a lease in place already, then we look at the income that's coming in off of that lease and capitalize that income into a value. The lease income is typically discounted a little bit for minimal expenses, management, accounting, legal, and maybe this new issue of taxes. But it's a pretty nominal reduction in income, maybe 8%, 10%. But then we capitalize that remaining net income into an indication of value so that we can come up with the value of the lease or the value of a perpetual easement.
00:20:38 · Paul Wright, Dave Westburg
[00:20:38] S1: Billboard easements are the perpetual right, generally perpetual right, to go on a property and operate your sign. And so easements have three components. They have a utility easement, they have an access easement, and they have a visibility easement or area. And those things can be purchased in perpetuity. If there's a lease in place already, then we look at the income that's coming in off of that lease and capitalize that income into a value. The lease income is typically discounted a little bit for minimal expenses, management, accounting, legal, and maybe this new issue of taxes. But it's a pretty nominal reduction in income, maybe 8%, 10%. But then we capitalize that remaining net income into an indication of value so that we can come up with the value of the lease or the value of a perpetual easement. [00:21:44] S0: And am I right that in many cases, billboard easement or a lease can be worth more than an actual billboard in terms of a cash flow multiple? [00:21:53] S1: They can be. Multiples of net income on lease or for an easement are typically higher because there's less risk in a billboard lease or an easement. Most of the risk is borne by the sign owner. They have to go out and get advertisers and they have to make sure that occupancy rates stay high and they have competition and have to keep up with rates. And so they're taking on a lot more of the risk. A landowner just collects a check and so there's relatively low risk and the lower the risk, the better the value in terms of capitalization rates and multiples.
00:21:53 · Paul Wright, Dave Westburg
[00:21:53] S1: They can be. Multiples of net income on lease or for an easement are typically higher because there's less risk in a billboard lease or an easement. Most of the risk is borne by the sign owner. They have to go out and get advertisers and they have to make sure that occupancy rates stay high and they have competition and have to keep up with rates. And so they're taking on a lot more of the risk. A landowner just collects a check and so there's relatively low risk and the lower the risk, the better the value in terms of capitalization rates and multiples. [00:22:34] S0: Mhmm. Landmark has been actively buying billboard leases and easements. I think they're up to 613 billboard leases or easements owned as of December 2018. Many out of home companies view them negatively. What's your take? [00:22:50] S1: Right. I think that they represent a threat to the industry, but not as big a threat as I originally thought. When they first came out and started to make acquisitions, I thought, wait a minute, here's a group that is trying to control the underlying right to operate the sign on the property. And as they evolved and as they started to accumulate leases, it became more and more apparent that their primary goal was to play margins, which basically means to buy low and sell high and operate in that gap or in that margin. And they're really looking for long term leases that have solid revenue stream. [00:23:39] S0: And I would say bigger leases, Paul. It seems like they don't wanna see a lease... Buy a lease if it's got less than $300 a month in rent, for instance.
00:23:39 · Dave Westburg, Paul Wright
[00:23:39] S0: And I would say bigger leases, Paul. It seems like they don't wanna see a lease... Buy a lease if it's got less than $300 a month in rent, for instance. [00:23:47] S1: Exactly. And even leases that have less than a year or five years, they want long term leases. And so the idea that they might come in and buy short term leases and then call the billboard company and say, hey, we're gonna raise your lease rates and now it's gonna be, you know, this huge amount of money that you can't afford. That really hasn't materialized. And so I think some of the initial early fears about Landmark have not been worn out. That said, when you start to accumulate 600 leases, there becomes this critical mass where you have more leverage and control. And so if those leases become staggered or set to expire in large groupings, then they can go to one particular sign owner and say, hey, we've got 75 leases expiring and if you don't raise your rates to x number of dollars, then, you know, you're gonna lose these locations. And so their leverage or their their bargaining power is growing. And so that's more of a concern to me than their initial modus operandi. I would say that their long term outlook and the way they're packaging those leases and pooling them for investors is a comfort to us, and it leads me to believe that they're not going to try to harness that into some kind of bargaining power. [00:25:21] S0: Mhmm. Paul, let's end with just a very short synopsis. I'll see an out of home company and you give me two or three sentence opinion of it. Lamar.
00:25:21 · Dave Westburg, Paul Wright
[00:25:21] S0: Mhmm. Paul, let's end with just a very short synopsis. I'll see an out of home company and you give me two or three sentence opinion of it. Lamar. [00:25:32] S1: I think Lamar is a well managed company that is conservative in the way they approach acquisitions and leasing and CapEx. And they've done an excellent job growing during this last few years. [00:25:52] S0: OUTFRONT. [00:25:53] S1: I'm a little bit surprised that OUTFRONT hasn't been able to cut their operating expenses as much as I thought they would when they spun off into a REIT. I think that there's more fat to cut there, but I also think that they're a little bit heavier. I think it's a little more difficult than I originally realized. I think the large markets that they're in with more sophisticated landowners and more transit agreements and that kind of thing is gonna make it a little harder for them to get as lean and have this efficient a company as Lamar. [00:26:31] S0: Clear Channel Outdoor. [00:26:32] S1: Clear Channel is in a real transition right now. It's going to be interesting to see how they emerge and the shape they take. I had hoped for a little bit more dramatic announcements and changes. I think that we're probably going to see that in the next year or two, But it's gonna be really interesting to see if they can make that transition.