Financing for Billboard Operators

You’d Think The Financing Would Be A No-Brainer…

You have finally found the perfect sites with great traffic counts, high visibility and limited competition. Permitting is secured, twenty-year land leases are in place, and advertiser interest grows every day. The situation is as good as gold. All that is needed now is simple financing so the project must be good to go, right?

Well, maybe not….

Simply stated, getting proper financing in place is not an easy task and can still undermine a project even with everything in place. There are a lot of variables to consider. In order to better understand how to navigate the financing maze, it is helpful to first break down the financing sources into basic groups:

• Local banks – This group tends to be the cheapest with respect to interest rate, but conversely they are often the most limiting. They often do not understand the key elements of the outdoor advertising industry and as a result, terms are often too short and they are apt to over collateralize the debt. (They do not understand the value of billboards.) Also, their legal lending limits may constrain your opportunity to finance larger projects quickly, and they often are limited geographically.
• National lenders – This group may or may not understand your business and often these players are not interested in smaller transactions in industries they do not know. Many operators are too large for local banks but too small for the national lenders.
• Niche lenders – This group understands your industry and can serve well to bridge the gap between the local bank and the large national lenders. They have invested the time to understand the business needs and to be able to provide financial solutions to outdoor operators. This expertise does come with a price however; so don’t expect to get this type of added benefit without a premium. (That premium may come in the form of a fee, higher interest rate or shared ownership with the lender as will be the case with venture capital firms.)
• Private equity – This includes individuals who typically know the operator personally and are willing to provide funding (equity investment or loan) to support their friend or relative with a project. Many people are not comfortable mixing business with friends and/or family, but this is not uncommon. It may include seller financing too.

The following insights are designed to help with a quick approval merchant cash advance in order to help outdoor operators best prepare themselves to handle the task of finding optimal financing. Be aware of the following and adjust your expectations accordingly:

• The loan process takes time and turnaround time will vary. This is because:
  1. You have to find someone willing and able to do your loan.
  2. You have to take the time to gather complete information about your company for loan committees and other decision makers.
  3. Loan committees and credit analysts need time to process the information, ask questions, etc. (And your loan is probably not the only request they are reviewing.) Many banks will need additional time to understand the industry if they are not familiar with outdoor advertising.
  4. Even after approval, the lender’s documentation and loan closing process takes time. There are collateral lien searches to be done, state and county UCC filings to be handled, lease agreements to be reviewed, etc. (Note that it typically takes three to seven days for UCCs to be processed depending on the state and county involved.)
• Geography/Location can impact your options. Often operators have an established relationship with their local bank. However, when they propose a project to the bank outside their local market, the operators are surprised that their bank is not interested. Many lenders like to lend in their own areas for a variety of reasons. Typically the reason for this is as simple as they like to be able to see and touch their collateral and to be able to meet their clients face to face. Obviously, geographic distance impacts this.
• Not all lenders understand the outdoor advertising business. Don’t assume that what makes sense to you will make sense to a lender whose expertise is spread thin over multiple industries. Most commonly, lenders not experienced with the outdoor advertising industry will dramatically underestimate the value of your plant as collateral affecting how much money they will be willing to advance.
• Loan size matters. In rural areas, local banks often do not have the lending capacity to handle large loan requests. On the other hand, large national media lenders that understand the industry and are competitive on rate typically are not interested in loans under $5,000,000.
• There is not one loan structure that will fit all needs. Commonly, borrowers think of a loan’s interest rate as the key consideration behind which lender to choose. However, there are other very important issues to consider:
  1. Collateral – Metropolitan Mortgage Corp website is ready to answer all your questions regarding the collateral. For example, Is the lender able to recognize that billboard structures are worth more than the cost of the steel? Is a first or second mortgage required on your home? If additional collateral such as a second mortgage is required, how will you secure future funding needs?
  2. Term – A longer loan term can significantly improve cash flow, and this can often be more valuable to a growing operator over the long-term. Stronger cash flow frees up funds for future investment.
  3. Amortization or payment schedule – Related to the term question is the repayment schedule. Typically loans are repaid via even monthly installments in arrears. However, some lenders require payments in advance. If so, is this acceptable to your situation? Is there a balloon payment? If so, can it be repaid? Would you benefit from an interest only structure for the first 12 months or some other variation of step payment? Is your lender able to be flexible enough to offer these options?
  4. Down payment requirement – What percentage of the project is the lender willing to finance? It is common for lenders to ask for 10% or more capital investment by the borrower. Understandably, this demonstrates to the lender that a borrower is truly committed to a project’s success. However, this required capital infusion could hinder a borrower’s ability to handle other business expenses or impede future investment. There are lenders who will loan 100% or more of the project.
  5. Prepayment – Most loans have prepayment penalties or yield maintenance clauses included. Many borrowers fail to understand that if a lender agrees to commit their funds to a project over a period of time, they need some level of assurance that those funds will earn the money that the lender will have budgeted for. Clearly it is in the borrower’s best interest to have no or little prepayment penalty, but this is often not feasible. The key question for the borrower here becomes what are the odds that the note will be paid down ahead of schedule. If the structures being financed might be sold early, perhaps the longest-term offer with the best rate is not the best deal if prepayment penalties are severe.
  6. Fees – Sometimes lenders can offer a competitive rate with acceptable conditions and terms, but with extra fees. It is common for lenders to recoup their own closing and documentation costs via fees, but others charge fees simply for revenue generation that can be overlooked by unwary borrowers.
  7. Personal guaranties – Lenders will usually ask that smaller operators personally guarantee the debt. They like to know that borrowers are fully committed to the success of the operation and that the borrower shares in the risk that the money might not be repaid if the business fails for whatever reason. Well-established businesses may have the strength to stand on their own and different lenders will have different requirements with respect to requiring guaranties. Does the bank with the lowest rate require a personal guaranty? How much is it worth to you to avoid placing personal assets at risk?
  8. Ownership – Conventional lenders will not require partial ownership in your company in exchange for financing, but some specialty lenders and venture capital firms will. This may be an alternative if conventional financing is not available at reasonable costs and terms, but one must consider the costs associated with giving up ownership in your company. Clearly this limits the upside potential.

Financing can be tricky and there are a lot of variables involved. Many people see the variables and choices as simply adding to the confusion and they let it intimidate them. Others see this as abundance. Within the varied financial landscape is an opportunity to structure capital to work most efficiently to maximize the wealth inherent in their project. With an organized approach and adequate time allowance, financing can be a tremendous tool to be used to create wealth for yourself and your family.

Keep in mind, the lower a lender’s perceived risk, the lower the loan cost should be. For example, if your lender is requiring down payment, consider how competitive the rest of that lender’s loan offering is – rate, term, fees, prepayment, etc. Realize that providing complete detailed information for the lender will only increase their comfort level with your company, which should result in a more competitive and favorable loan offer to you.

Getting a good plant in order takes diligence and hard work as billboard operators know well. There is value in that. Don’t surrender that value by short-changing or shortcutting the financing aspect of your business.

Article Contributed by:
Mr. Chris Stark
Midwest Bankers
9000 Keystone Crossing Suite 630
Indianapolis, Indiana 46240

Lamar Advertising Company reported its financial results for the three months ending September 30, 2001 when it filed a 10-Q Report with the Securities and Exchange Commission on November 13, 2001. Management held a conference call for shareholders and securities analysts to discuss the results on November 7, 2001. Revenue at Lamar was up 1.87% in the latest calendar quarter due to acquisitions over the past 12 months. If revenue is viewed on a “same store” basis (measuring only the income from the billboards that were owned last year at this time), it was down 3%. Not bad considering the weak advertising market for most media companies. The national economy has been weak for nearly 12 months even though a recession probably did not begin until just recently. Lamar’s performance is good relative to other advertising businesses.

The profits in last year’s 3rd quarter turned to losses this year, in spite of the higher revenue. The company earned $12,857,000 in Operating Income last year but suffered a loss of $3,588,000 in 2001. Management reports that land leases and labor represent about 30% of expenses, and these can be viewed as largely fixed. It is short sighted and potentially suicidal to take billboards down in order to save lease expenses. Labor costs are difficult to trim because employees need to be retained to manage the existing sign plant and be available when business turns around.
The loss this year was due in part to the cost of acquisitions. As the acquired companies are fully absorbed over the coming months, total operating expenses are likely to be trimmed and future earnings will benefit. Also, the expenses incurred in making acquisitions will not have to be repeated in future periods.

The company has plenty of recent acquisitions to digest. On January 1, 2001, Lamar bought American Outdoor Advertising and Travel Centers for $31.5 million, and Appalachian Outdoor Advertising for $20 million. On February 1, 2001, Bowlin Outdoor Advertising and Travel Centers was purchased for approximately $44.4 million (including 725,000 shares of Lamar stock valued at $29 million). On April 1, 2001, DeLite Outdoor Advertising was acquired for $43 million cash, and PNE Media was purchased for $21 million cash. The last acquisition was on August 2, 2001 when Capital Outdoor was bought for approximately $30 million. During the nine months ending September 30, 2001, Lamar completed 73 additional acquisitions of outdoor advertising and transit assets for cash totaling $112 million. Americans are beginning to see many more billboards with the Lamar logo.

This hectic pace of acquisitions has come to an end for the time being. Management at Lamar reports that there are currently no additional acquisitions planned for the remainder of the year, and activity is not likely to pick up right away in 2002. Many smaller sign companies still have high expectations about the value of their plants and they are not willing to sell at what they believe are discount prices. Since many of these operators have to meet only modest debt service, they can weather the current weakness in the market and wait for better prices before they decide to sell. Lamar management stated that they are not very happy with values that some sellers are asking right now, and the company will not use its cash to overpay for acquisitions. They will continue to watch for reasonably priced sign plants.

Lamar’s sign plant, like its national competitors, has some strengths and some weaknesses. The strongest portion of the plant is the company’s highway billboards that are categorized as “directional” Bulletins (usually 14X48). These signs are at locations sought by motels, restaurants, and other businesses that want to gain the attention of travelers who may be customers. These advertisers are renewing their advertising contracts in spite of the weak economy because they rely on the highway traffic and need to maintain their advertising exposure. They may also want to keep a competitor from advertising in their place. Highway directional signs are renewing at a good pace for Lamar and many customers have accepted modest price increases.

Other types of signs are not achieving high rates of renewal even at existing prices. General circulation Bulletins and Poster Panels are experiencing weak demand that will not support price increases. In fact, many advertisers are not interested in renewing even at discounted rates. Lamar is getting business from these advertisers by offering “preemptive” advertising contracts. Under this arrangement, the advertiser agrees to buy ad space, often at a discounted rate, for a certain period of time. However, in exchange for the lower price, the advertiser agrees to give up the space after a minimum period if the sign company can find another customer at the regular rate. The sign company can then “preempt” the original ad and put up the message of the new customer. This arrangement allows the sign company to maintain at least some level of income when demand for space is weak. About 30% of Lamar’s billboards are general circulation Bulletins (not directionals), and management estimates between 10% and 15% of advertising renewals for these signs are on the preemptive basis.

During the conference call, a securities analyst asked management’s opinion of the price that Clear Channel paid to acquire AK Media. Management stated that the AK Media plant had “great franchises” in Boston and Seattle and the acquisition seemed attractive at the stated price. The acquired billboards were described as “underutilized,” with the potential for higher income when melded into the Clear Channel national sales efforts.

Lamar sees the billboard industry continuing to struggle for the rest of 2001 and much of 2002. The company expects to have difficulty pre-selling its inventory as far in advance as it normally does. During the past several years, the company has signed up advertisers in advance for about 70% of its annual capacity by the end of January. Such “visibility” of customer sales in future months is unlikely to exist in January 2002. However, management is optimistic that financial results will improve relatively quickly once the economy improves and advertising spending recovers.

In a conference call on October 15, 2001 with institutional investors, Obie Media reported on operations for the third quarter of 2001. Obie is an outdoor advertising company primarily operating billboards and transit advertising displays. Some of the comments in the conference call were directed specifically at the billboard side of the business.

The company reported that billboard sales remained “strong and relatively within original budget parameters at $1.8 million this year, a 6 percent increase over the $1.7 million from last year.” For the first nine months of 2001, sales were $5.4 million, about 8 percent above the prior year results. Management stated “Our outdoor advertising sales are solid, maybe a little soft on the hospitality side but not much. Our billboards are primarily permanent highway painted billboards that are out there on longer term contracts and we still run well above 90 percent and have a very good outdoor advertising plant and one we can depend on.”

A question was raised about the value of the company’s billboard division based on a multiple of 14 times cash flow or Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA). Management reported that the projected EBITDA for 2001 on billboard operations is about $3.1 million. Company representatives went on to say that the value of the entire plant would be $31 million if valued at ten times EBITDA. Next year, the EBITDA quick view is about $3.3 million. The value would be $33 million if forward EBITDA in 2002 is used in the equation. At multiples of 14 times EBITDA, the plant value would be “a little over $43 million on this year’s numbers and $46 million on next year’s numbers.” Management was also asked to use a Gross Income Multiplier of 6 times net revenue to estimate value. “Further, in doing the math on six times revenues, six times current year projected revenues, would be a little over $43 million and six times next year’s projected revenues at this point would be slightly less than $47 million.” This question reinforces that opinion that multiples of EBITDA and effective gross income are the common measures of fair market value in this industry.

Management also reported on the prices of their recent acquisitions: “As to the billboard acquisitions, there were three of them and we paid approximately $4.5 million and those ran somewhere in the neighborhood of 5 to 6 times revenues. It’s pretty much similar to what’s been going on in the industry.”

The Nevada Supreme Court recently addressed several fundamental billboard appraisal issues in the case known as National Advertising Co. v. State Department of Transportation, 116 Nev. Adv. Op. No. 10, issued on February 2, 2000. This case arose when the Nevada Department of Transportation (NDOT) removed billboards for a highway construction project south of Reno. A total of four signs were owned and operated by National Advertising Company and by Donrey of Nevada on leased land. The local jurisdiction, Washoe County, restricts the placement of new billboards, and the companies were unable to find suitable replacement locations. The companies therefore sought compensation for the removal of their property. The case went to the Nevada Supreme Court after National Advertising Company appealed the original decision by Judge Mills Lane of the Second Judicial District Court, Washoe County. The Supreme Court’s decision provides useful insight concerning the valuation of off-premise signs taken under imminent domain. For this article we have reviewed four key questions that were answered by the court:

Do billboards generate “business income” that is not compensable in condemnation takings?
The District Court concluded that advertising income to the billboard companies was “business income” and, therefore, not pertinent to this case. However, the Supreme Court reversed this conclusion and stated, “The income generated from the billboards should have been considered in determining the value of the Advertising Companies’ leasehold interests.” The following footnote was added, which calls for consideration of the business income under the income capitalization approach:

The Advertising Companies are not entitled, nor do they seek, to recover lost intangible business income. In order to determine the value of the leasehold interests, however, the advertising rental income must be considered under the income capitalization approach, which adjusts the anticipated net income to present value through the capitalization process. 8A Nichols on Eminent Domain Sec. 23.04[4] [b] at 5d (3d ed. 1997, 1998).

Are billboards real property that should receive compensation, or personal property that should not be compensated?
The second point addressed by this recent decision deals with the long-argued characterization of billboards as either real property or personal property. Since most items that are categorized as personal property can be removed at will by the owner, personal property is not normally compensable in right of way condemnation cases. Billboard companies usually claim that signs are personal property for taxation, although they sometimes characterize signs as real property in condemnation proceedings. While this has been important for separate legal reasons, the distinction did not matter to the Supreme Court of Nevada. The court addressed this issue in some detail:

[S]ome courts focus on whether a billboard is characterized as personalty or realty, as does NDOT, in determining whether advertising income should be considered in assessing the value of leasehold interests, or in determining whether a billboard owner is entitled to compensation at all. Those courts conclude that if a billboard is characterized as a trade fixture or personalty, then either it is improper to consider the advertising income it generates, or the owner is not entitled to compensation at all. (Citations omitted.) Other courts conclude that the characterization of a billboard as either realty or personalty is an arbitrary distinction, and that advertising income generated from billboards that cannot be relocated should be considered in valuing leasehold interests so that owners will be justly compensated. (Citations omitted.) We conclude that this latter approach is the better means of awarding just compensation for condemned leasehold interests when billboards cannot be relocated to comparable income-generating site[s].

In other words, the court ruled that if an income-producing asset that is location-dependant is taken in an eminent domain action, the fair market value of the asset should be the basis of just compensation whether or not it is strictly real property.

Does the “bonus value” method result in the proper estimate of compensation?
Next, the decision addressed the issue of the “bonus Value” method. In its earlier decision, the District Court adopted the “bonus value” approach used by NDOT. Under this method, the billboard companies are entitled only to the value of any benefit inherent in ground leases that are below market rates. The Supreme Court reversed the District Court stating in part, “[w]e conclude that the district court erred when it awarded the bonus value of the Advertising Companies’ ground leases and did not consider the advertising income generated by these billboards in calculating the value of their leasehold interests.”

In a footnote the court explained that part of its position was based on the fact that the signs could not be relocated.

Because we conclude that the subject billboards cannot be relocated, we need not reach the issue of whether the district court erred in finding that the billboards were removable trade fixtures as a matter of law. As demonstrated above, we believe the threshold issue is whether the billboards can be relocated to a comparable site within the market area such that the Advertising Companies can replace their lost advertising rental income. If the billboards cannot be relocated to a comparable site, as is the case here, then the state must compensate the billboard owners for the valuable interests taken, that is, the value of their leasehold interests, taking into account the irreplaceable, lost rental income.

With this footnote, the court recognizes that the value of most billboards is inextricably bound to its location.

What are logical and accepted methods of appraisal?
The fourth point is important for billboard companies, condemning agencies and sign appraisers because it concerns appraisal methodology. Throughout this decision, the Nevada Supreme Court supports the comparable sales approach and the income approach. Both of the sign companies’ appraisers used the Gross Income Multiplier method (comparable sales) and the Capitalized Income method (Direct Capitalization). The court stated that “Under the circumstances of this case, we believe that either the comparable sales method or the income capitalization method would be a better means than the bonus value method of appraising the market value of the Advertising Companies’ lost interest.”

Market prices for billboards and billboard companies are still in a declining trend. The highest multiples of a billboard’s Effective Gross Income^* (or Net Revenue) were paid in 1998 and 1999. This pricing measure reached an average of 6.2X EGI according to our calculations for 1998, and declined to 5.6X in 1999 and 5.5X in 2000. This trend is also consistent with acquisition prices in other industries that went through aggressive acquisition phases in the late 1990s. The high prices were fueled by the excessive prices in the stock market resulting from an expanding economy with low inflation. Debt and equity financing were readily available to buyers and no outdoor advertising company’s price seemed too high. By the time the dust began to settle in 2000, the three largest billboard companies had made enough acquisitions to own more than 80% of the sign faces in the United States. Acquisitions are still occurring in 2001, but prices have continued to trend downward. Our research indicates that the average EGIM in 2001 is down about 20% from the prior year and is currently below 4.6X.

Lower prices in 2001 are also evident based on multiples of cash flow or Earnings Before Interest Taxes Depreciation and Amortization (EBITDA). The average EBITDA multiple in 1998 was 12.4X. Our reconciled data in 1999 and 2000 suggests that cash flow multiples were approximately 15X to 16X EBITDA. According to this data, prices reached their peak in 1999 and 2000. EBITDA multipliers in 2001 are averaging about 11X cash flow, which supports the downward trend seen in EGI multipliers.

The reasons for declining outdoor advertising asset prices are clear. As the national economy moved from expansion in 1999 to contraction and recession in 2001, advertisers began to spend less money. Billboard occupancy fell. Advertising rates softened. Smaller billboard companies that were available for sale found that a buyer’s market was developing. In most cases, these smaller operators that expected to sell at the prices recorded in 1998 and 1999 were not able to consummate a deal.

Lamar Outdoor (one of the three leading outdoor advertisers in the country) continues to look for attractive companies to acquire, but fewer deals are expected in the next 12 months than in the past 12 months. This expectation is due to three factors. First, there is normally a natural decline in the volume of acquisitions in the second half of the calendar year. Many deals negotiated during the year are delayed until after December 31st for tax purposes. Second, there are fewer companies to acquire. Past consolidation has reduced the number of attractive target opportunities. Third, many sellers are not willing to take a lower price in the current economic environment. If a seller’s debt level is low enough, they can ride out the current slump in advertising revenue and wait for better opportunities in 2003 or 2004. Although, these billboard operators may have lower profits in the next 12 to 24 months, they will continue to own valuable assets.

^*Effective Gross Income is the amount of actual receipts of a billboard owner. It can be approximated for individual signs by deducting vacancy and commissions from market rates.

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