Billboard owners sometimes find it difficult to obtain financing from banks that are not familiar with the industry. Even if owners take the time to educate lenders about the outdoor advertising business, banks may not be willing to lend to industries where they are not experienced. However, once bankers understand that billboards typically generate high cash flow and have substantial market value in most cases, they understand that the risk level is relatively low.
Billboards are usually very valuable assets. Market value is much greater than the book value on the balance sheet. Billboards have three main components to their market value: the permit, the leasehold interest for a specific site, and the physical structure. A fourth element can also include advertising contracts to display the customer’s message. However, there are usually buyers ready to acquire billboards even without advertising contracts in place or the physical structure erected. Owners of other signs in the area are normally willing to acquire additional billboards if a site is leased and a valid permit is obtained.
Some lenders have found a very profitable market niche lending to the billboard industry. There are opportunities for any lender in almost any area of the nation. Lenders should consider billboard cash flow, market demand, collateral market value, and documents for the loan file.
High Cash Flow
One aspect of the billboard industry that is not well known to most bankers is the high rate of cash flow. The largest billboard companies in the United States consistently report earnings before interest, taxes, depreciation and amortization (EBITDA) in the range of 40% to 50% of revenue. This is very high compared to most other industries. Some small companies with signs on highways and in rural areas can achieve EBITDA margins of 60% or more, since there is often lower required maintenance on rural billboards that may not need to be painted more than once each year. Overall, billboards tend to generate consistently high cash flow.
Strong Demand for Billboards
Bankers are sometimes surprised to learn that success in the billboard industry comes from simply owning the signs, rather than from the operating ability of the owner or manager. Basic demand for billboard space allows virtually anyone to own the signs and operate profitably. While some owners may not do a good job of keeping the sign faces filled with advertising and maximizing profits, a new owner can usually take over and maintain at least the same level of earnings. A new owner may even raise occupancy, revenue, and profits. The risk is quite low that bad management will extinguish the business value in an outdoor advertising company. Usually the only question is whether profits will be modest or substantial. The risk of failure exists in any business, but it is low in this industry. Risk is reduced even further for lenders because revenue usually continues to come in for long contract periods that typically range from one to three years for most highway signs.
While risks are small, they do exist. One risk is that advertising rates can be soft during economic recessions. However, a weakness in rates is normally modest and only serves to shrink otherwise strong earning margins. There is also a risk of high vacancy. If management is not consistently looking for new advertisers or if the local economy is in steep decline, sign owners can find it difficult to keep their boards fully occupied. Vacant billboard faces obviously generate no revenue; however, severe vacancy is very rare in the billboard industry. There are usually some businesses in the area willing to advertise on billboards. Vacancy risk is minimized if there is a scarcity of signs in the area.
Billboards as Collateral
In worst case scenarios for lenders, collateral may have to be liquidated. Fortunately, in most cases it is quite easy to find a buyer who will pay a fair price for the signs. The most likely buyers are owners of other billboards in the same area or in nearby states. Lenders seldom have difficulty recovering the full amount of their loans. Market values are much higher than depreciated book value.
Billboards that might not sell quickly are those in isolated areas a long distance from a city or town. These signs can be more costly to service, and fewer advertisers are usually interested in renting faces. However, there are usually buyers even for these billboards.
The market values of billboards have remained relatively high in the past few years, after rising to peak levels during the mid- to late-1990s. Prices are usually based on the “effective gross income” (EGI) that can be achieved each year. EGI is the amount of actual revenue for existing signs, or the estimated amount for signs to be erected. The amount can be estimated by starting with the market rate for other billboards nearby, and deducting allowances for vacancy and commissions to advertising agencies. For instance, if ad rates in the market are $500 per month per face, EGI might be estimated at $350 per month after an allowance of 15% for vacancy and 15% for commissions. The monthly EGI is normally converted to a yearly amount, in this case $350 per month is $4,200 per year.
Rural billboards, particularly those mounted on wooden poles instead of steel, tend to sell at the lowest multiples. Prices may be as low as three times annual EGI, or 3X. Only the worst signs are likely to sell for a price below 3X. Billboards on steel supports and signs near cities and towns often sell for multiples of 4X to 5X EGI. Prices are even higher for some premium locations. For example, tight restrictions on new permits may create a premium price for existing signs. Or, another sign owner may be interested in expanding and will pay a high multiple to make acquisitions. The most common buyers of billboards today are existing local and regional sign companies looking to expand and the publicly-traded firm, Lamar Outdoor Advertising. Lamar, the third largest billboard company in the United States, is buying signs mainly outside the largest U.S. cities that may not interest the two largest billboard operators (Viacom Outdoor and Clear Channel Communications).
One unusual fact in the billboard industry is that even unbuilt billboards may have substantial value in the market. Those unfamiliar with the industry often believe that billboard value lies in the wood and steel of the sign structure itself. Consequently, they think that there is no value until the sign is erected. This is not true. Buyers often purchase just the site lease and permit since those are usually the most difficult components to secure. Once those components are in place, a sign can be erected easily at a relatively modest cost, and advertisers will typically follow. In fact, some individuals and small businesses specialize in obtaining only land leases and permits that are then sold to billboard companies. If lenders want to have the highest degree of safety, they may want to know that an advertiser is lined up for a billboard once it is erected. But that is not always necessary. The existence of an erected physical structure may be the least important factor in the market value of billboards.
Documents for Lenders
Lenders usually have a list of required documents that must be submitted before a business loan is made. There are four key items often found in a billboard loan file. First is the list of billboard locations and copies of leases for the sites. The most advantageous leases obviously are those at low rates for long periods of time. This assures the continued operation of the sign at the best possible profit margin. Leases for 10 years or more provide much more safety than leases expiring in one or two years.
The site lease expense is normally at an amount that ranges from 10% to 30% of effective gross income, although there are always exceptions. The beginning lease amount usually escalates over time, like typical real estate leases. Some site leases call for the landowner to receive a percentage of the billboard advertising revenue. Percentage leases may have a base rent that puts a floor on the amount that the landowner will receive each year. The borrower can provide information on billboard income in order for the site lease amount to be calculated. If actual advertising contracts for billboards are not available, income data can be found in published or quoted advertising rates by billboard operators in the area.
The second item for the loan file is a copy of each sign permit. A permit is issued by the appropriate governmental authority such as a state, city, county, etc., and may need to be renewed annually for a small fee. The permit is critical because without it, the value of the sign is gone. Buyers rarely buy a billboard that does not have a valid permit.
A third part of the lending file may be copies of advertising contracts if the billboard company is not well established. New sign owners should be willing to demonstrate the source of their advertising income by giving the lender a copy of any existing contracts. This allows the banker to verify advertising rates, length of contract, and credit worthiness of the advertiser. Contracts that run from month to month present a small risk that they will be terminated on short notice. However, most ad contracts for rural signs, and those in small or medium sized towns, are for periods of one or two years. Lenders may not need copies of ad contracts from established businesses because historic income statements will demonstrate the existence of the revenue stream. Lenders may also be willing to forego ad contracts for unbuilt signs if it is likely that advertisers can be found.
The final item for the loan file is the plan to gain title to the signs in the event of default. This includes the typical assignments that commercial banks and other institutional lenders normally use in their banking practices.
Summary and Outlook
Lenders can be confident in making loans to most reputable billboard owners because of the high cash flow that is standard in this industry and the high liquidation values available in the open market. Nearly all billboards are highly profitable and can usually be sold quickly and easily. Prices can be estimated at three to six times EGI in most cases.
The outlook for the industry is very bright. While the national economic recession that started in 2001 put a damper on ad spending, future ad rates should be higher and vacancy should be low. With tight restrictions on building new signs in most cities and towns in the United States, billboards will continue to be scarce assets. This bodes well for continuing high cash flow and resale values for billboards.