John Weller on the Out of Home Debt Markets

Why billboard operators should lock in cheap debt before recession

Out of home advertising has become an attractive credit market because its cash flow is steady and digital adds growth. The medium is also highly cyclical, and lenders abandon it first in a downturn. With credit near a frenzied peak, Weller and Westburg urge operators to lock in favourable terms while borrowing carefully.

Takeaways

• Outdoor's steady cash flow attracts lenders. Weller cites barriers to entry, steady cash flow, growing revenue and few bad debts from local and regional advertisers. He calls outdoor boring and dynamic at once, with digital adding growth, though many commercial banks still avoid it.
• Credit is loose, and the cycle will turn. Weller says lenders move from conservative after a downturn to seeking growth to a frenzy, which is today. Westburg calls outdoor the last market lenders enter and the first they cut, and urges locking in multi-year bank deals now.
• Out of home swings about three times the economy. Westburg notes the medium fell 3% in the 1992 recession, about 1% after 2001 and almost 20% in the 2009 Great Recession. Lenders want operators who know what to change when a downturn arrives.
• Rising rates shrink how much operators can borrow. Westburg estimates debt capacity falls about half a turn for every 200 basis points. Billboard Loans caps debt at five times trailing twelve-month EBITDA, so loans repay without big revenue growth and leave cash for capital spending.
• Digital conversions top the demand for loans. Billboard Loans lends $100,000 to nearly $1m to small owner operators. Digital conversions lead requests, then small add-on acquisitions, then new builds. Weller says the best value comes from permitting and building a site yourself.
• The Thomas case poses real regulatory risk. Westburg says the case could overturn the existing out of home regulatory system, which the speakers would prefer to keep. Weller credits the Out of Home Advertising Association of America for its lobbying and legal work.

One word for each public operator

• Lamar Advertising Company is consistent. Debt to cash flow of about 3.3 times gave it room for growth such as the Fairway acquisition.
• Outfront Media is aggressive, with big transit bets including New York and Boston contracts and leverage typically around 4.5 times.
• Clear Channel Outdoor means uncertainty. Weller considers leverage above 8 times too high, and it separates from iHeartMedia later this year.
• Weller predicts the lending group that initially owns Clear Channel Outdoor will be impatient and may look to monetise its stake.