A hurdle rate is the minimum acceptable return on new capital expenditures. It is the excess cashflow (EBITDA) on a new out of home capital project divided by the incremental cost of the out of home capital project. Two-thirds of Billboard Insider’s readers have a hurdle rate for new out of home expenditures in excess of 20%. Nearly one-fifth of Billboard Insider’s readers have a hurdle rate for new out of home investments in excess of 30%. Here are some data points to help you decide what hurdle rate makes sense for your out of home company.
The risk free rate of return (e.g. the return on a 20 year US Treasury bond) is 5.14% at October 17, 2023.
Most private equity funds want a 20-30% annual return when they invest in out of home.
Small stocks have returned 11.8%/year for the past 1926-2022 according to the Ibbotson SBBI index.
You can calculate the return which the stock market expects from Lamar Advertising, OUTFRONT and Clear Channel by using the Capital Assets Pricing Model. The expected return for each company’s stock consists of the risk free rate of return plus a risk premium which is the beta of each company’s stock times a market risk premium. It is the return which compensates the stockholders for the risk of holding the company’s stock. We’ll spare you the math but when Billboard Insider computes the Capital Assets Pricing Model expected return for the public out of home companies we get the following:
- Lamar Advertising 14.7%
- OUTFRONT Media 16.99%
- Clear Channel Outdoor 22.2%
The market is demands a higher return from OUTFRONT and Clear Channel Outdoor because their transit urban and international revenues are more volatile and they have higher financial risk (e.g. more debt) than Lamar.
Billboard Insider’s take: If you can’t meet a 12% hurdle rate on your out of home investments you ought to sell your out of home company and buy a US small stock index fund. A hurdle rate of 15-20% makes sense for low risk projects like lighting retrofits or other expense saving items because you’ll see the improved cashflow regardless of what the economy does. A hurdle rate of 20% or more makes sense for digital billboard retrofits, new builds or acquisitions. Private equity investors want to see a 20-30% return on their out of home investments. The US stock market expects a return of 15-22% from the public out of home companies.
This post is based on a talk Billboard Insider’s Dave Westburg delivered at the Outdoor Advertising Association of Georgia Show on October 8, 2023.
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