Seeking Alpha has published a report by Brad Thomas titled Who’s Betting on Billboards. Thomas is a good analyst but he gets this wrong.
“…because billboard REITS are essentially in the advertising business, there are erratic capexp requirements”
Out of capital spending is not erratic. It is predictable and can be budgeted. A steel monopole will last for 50 years and doesn’t need much upkeep besides painting. Jim Matalone the former CEO of Ashby St Outdoor told Billboard Insider to budget maintenance costs of $50/year for billboard structures. At Lamar Advertising, maintenance capital spending has been stable at 1.2% of revenue for the past two years. Total capital spending has increased due to Lamar’s decision to increase what it spends on new digital billboards.
Digital billboards have predictable capexp. They aren’t like radio station transmitters which fail without warning as they age or are hit by lightning. The light components of a digital billboard will dim and should be replaced at 100,000 hours or about 11.5 years of 24/7 use. You won’t have to replace the entire board however. You will be replacing the LED components – maybe 50-65% of the upfront cost of the digital face. This is not an erratic expense but is predictable and can be budgeted.
Capital spending for new construction or digital billboard conversions varies year to year based on the number of new projects a company wants to do. These costs are not erratic. It takes a long time to permit and order and install a digital sign. It’s easy to budget for this.
If Thomas meant to say that out of home cashflow is more erratic than real estate cashflow because its ad based then he has a valid point. Ad revenue, particularly national advertising dollars, is cyclical and declines in a recession. Ad revenue may be erratic, but maintenance capital expenditures are not.
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It also seems important to define what “maintenance capex” means, since it diverges so considerably from total capex. Just take a look at the figures for Lamar that are highlighted above… a 2yr avg “maintenance capex” of 1.2%, but actual capex of 7.7%. That 7.7% of revenue figure exactly matches the average over the past dozen years. If they’re spending 6.5% of revenue (7.7%-1.2%) purely on “growth” capex, with organic revenue in the low single digits, they’re sure not getting much of a return on that “growth” capex.