Link Media Outdoor’s parent company, Boston Omaha Corporation (BO) shared their letter to the company’s shareholders earlier this week. Typically, corporate letters written for shareholders and the public are intentionally full of incomprehensible jargon to make it more difficult to understand just what the hell is the condition of the company. 99% of are thrown in the trash or deleted. Not Boston Omaha’s.
With phrases like; “You are more likely to see the Patriots or Red Sox lose”, “We are the marrying kind,” “the dirt underneath its boards,” and “leave predictions to the perfectly confident vision of the talking heads on TV,” the BO letter is as plain yet clever communicated statement of a company’s condition you’ll likely ever read.
12 Key Observations by Link Media Outdoor’s parent: Boston Omaha
We have outlined 12 larger and most illustrative comments. The whole of the document is enjoyable and informative. It has value for every one, whether you are in sales, finance, leasing, management or brand/agency side. Own or thinking of owning a billboard plant? If you are on the OOH Providers side of the business, we highly recommend reading.
Or just skip my lengthy summary and go to the link⇒ the full BO Shareholders Letter
- Billboard customers don’t rent faces based on who owns them
In 2018, we invested more capital in additional billboards than in all our other
investments combined. Link’s largest presence is now in the mid-west, with a dense billboard
footprint in Nebraska, Kansas, Iowa, Missouri, Illinois, and Wisconsin and a less dense
presence in Virginia, West Virginia, Alabama, Florida and Georgia. - Two Types of Large Billboard Buyers
Historically, there have been two types of large buyers in the billboard business:
i) “perennial daters,” who purchase boards with the intent to resell at some later
date (private equity is a good example), and
ii) “the marrying kind.” We are the marrying kind.
Last year a remarkable number of billboard assets came to market. Anecdotally,
one key broker in the business indicated the dollar amount of deals in 2018 has been
three times their normal amount.
We like the billboard business, so when a lot of billboards are for sale in attractive
markets, it is important to seize the opportunity, while always being mindful of price.
Our management team continues to impress us with their ability to run the assets we
have acquired. - Billboard Operations at Link Media Holdings
As of December 31, 2018, we have invested over $178mm in billboard assets. In
exchange for our cash, we own approximately 2,900 structures and have approximately
5,400 advertising faces (approximately 5,900 advertising spots counting digital face
flips) for rent in 11 states. - Why Billboards are an Attractive Business
Big picture, we believe billboards are attractive for three reasons:
(i) they generally earn a favorable return on tangible equity capital,
(ii) from that initial return, cash flow can grow over time without needing much incremental capital, and
(iii) that growth can endure long-term if demand continues to grow while supply constraints
remain in many markets. - Increasing Inventory via Digital Faces
It’s difficult to add materially to the number of billboard structures in a number
of places in this country and near impossible in certain cities. Sure, there are some areas
where new permits for a new structure are more tolerated than others. Throughout
much of the country, and specifically in the areas Link attempts to target, huge increases
in new billboard structures are limited. A meaningful source of the increase in supply of
advertising faces today comes from swapping static billboard faces for digital faces that
can generally sell seven or eight advertising spots a minute. - Pros and Cons to Converting to Digital
There are pros and cons to converting a static face to a digital one. On the pro
side, there is generally an increase in breadth of customers. Advertisers who may have
never considered billboards now can buy a billboard spot to attract customers to a
limited time event without the labor or material cost of erecting a vinyl ad. As an
example, McDonald’s can now advertise its limited time offering of Alex’s favorite
delicacy, the McRib sandwich.
A con is that too much digital in a market can also mean unsold inventory. As a
result, you have less revenue than planned yet you have the constant cost of the very
real digital face depreciation. At the same time, more advertising spots could cannibalize
other assets in the vicinity. - Attributes For Buying Billboards
A few attributes we look for when buying more billboards are:
(i) the day one cash yield relative to our purchase price,
(ii) proximity to our owned boards for any cost efficiencies,
(iii) a favorable geography both economically and regulatorily,
(iv) attractive land lease and/or easement portfolio, and
(v) occupancy and rate levels relative to both the competition and the billboard’s history. - Land Costs
At Link we focus relentlessly on land costs. It is both a material line item and a
variable we can try to manage and influence for the long-term. Since Jim McLaughlin
came on board as President, Link’s land expense as a percentage of revenues has fallen
from over 28% in Q2 2017 to just under 20% in Q4 2018. Link currently owns around
3% of the dirt underneath its boards.
The team at Link is working to lower our land costs further by focusing on
acquisitions with existing favorable land costs, purchasing permanent easements when
available at a reasonable price, and by negotiating lease renewals fair and favorable to
the company. We believe those last two ideas are not mutually exclusive. - Importance of Incentives for Sales Teams
Sales expense is not broken out but is also of large importance as incentives
drive our sales team. When it comes to our sales team, having a seasoned operator like
Jim McLaughlin able to structure, incentivize and coordinate is a tremendous value to
the company. Rather than go into detail here about what makes Jim’s operation
effective, and risk leaving a blueprint for competitors to follow, we will just point to his
results.
In the two years since taking the job, Jim has built a sales team that has pushed
occupancy up over ten percentage points while also increasing rate, and has materially
increased our contracted future revenue. Jim and his team feel there is still considerable
room for improvement, and we applaud both the work done to date and the
simultaneous acknowledgement that there is much left to do. - Incentivizing Management
Management at Link is highly incentivized to get the cash flow from the current
assets up to 10% of the total capital invested. There is a lot of work left to do in order to
improve the productivity of the assets from present run-rate levels. - Zero Debt
Finally, no discussion about Link would be complete without mentioning that, to
date, we have zero debt. That will not always be the case as a conservative amount of
Link debt (non-recourse to BO) at relatively low-cost makes sense to us in the
billboard business given its many variable costs and low capital requirements. We are
actively exploring our options with an emphasis on the aforementioned “conservative”. - A Review of Our Framework for The Road Ahead
You are more likely to see the Patriots or Red Sox lose in the Superbowl or World
Series to a team from LA than to catch us making quarterly or annual earnings forecasts.
We think it is worth more to shareholders to lay out our general decision-making
framework and leave predictions of the future to the perfectly confident vision of the
talking heads on TV.Boston Omaha framework:
● Get incentives right – A constant attempt to align interests.
● Decentralization – Find the best, smartest and most motivated manager available.
● Long-term thinking – Take advantage of a long-term holding period afforded by a
public holding company by finding businesses that will be around for as long as
possible.
● Focus on cash – Where can it be generated durably over time, at the highest rate
and at the lowest cost among the various opportunities generally available to us.
● Partnership – We seek to work with competent, reliable partners and strive to be
one ourselves. In addition, the company is run by individuals who are investors
in Boston Omaha.
Operational information we believe is useful in assessing our
progress annually, but we also show Q4 2018
And for now, that concludes our tour of Boston Omaha for 2018.
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