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We Don’t Own Jack Sh$t …Or Do We?

OOH ...Here’s One Thing by Jim Johnsen

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OOH …Here’s One Thing  

by Jim Johnsen,
Managing Director, Johnsen, Fretty & Company

My friend Bill Board, was kind enough to invite me to write a periodic #OOH column.  Since I am a man of few words, I promise to keep my riffs short and focused on one thing.

 

We Do Not Own Jack Sh$t …or Do We?

Being a guy who wakes up and thinks about asset value everyday, I am always fascinated by new ways to look at value. Recently I got sucked into reading an article on new techniques to value intangible assets. If you feel like geeking out, here is the link to the article: https://blogs.cfainstitute.org/investor/2019/01/11/a-renaissance-in-intangible-valuation-five-methods/

Over the last 30 years, I have had more than a few conversations with local and regional lenders trying to wrap there heads around where the collateral resides in an outdoor advertising business. I’ve consistently told them collateralizing the steel really doesn’t do much since all the value lies elsewhere. The pole we put up in the air to fly customer’s copy, ain’t worth merde if its cut down and sold for scrap.

The intellectual property is everything; Namely the exclusive right to be on that stretch of roadway (i.e. the local and or state permit) and the underlying lease or easement that gives you the right to protect that exclusivity for a very long period of time. After repeating myself several times, some of them get it.
Many do not.

Dumb lenders right? Let me turn the glass over. If I went to 100 died-in-the-wool outdoor operators and said to them, the ONLY thing you really own is some intellectual property, how many of them would throw me out on my ear? We are a physical bunch by the way. Anyway, I think you get my point. Yes, we build big beautiful signs. Any yes we “v” them and angle them just right to get that perfect read for our customers. But can you imagine if zoning changed and competitors were allowed to put signs within 100 feet of your sign. What would that perfect read be worth then? Alternatively could you imagine you have 18 months left on a conforming lease and your lessor puts out a flyer inviting others to bid on the opportunity. Still a great read and a helluva piece of steel…but my guess is, that would have a ‘chilling’ effect on the sale of that asset. (Of course, legal conforming versus legal non conforming is a game changer in lease management, but I will leave that for another article.)

So why is the outdoor advertising business so profitable and valuable? Other businesses define success as a 15% operating margin. We complain when its under 40%. Most other old line businesses in the United States, trade at between 5 and 7x cash flow. Why are we trading at between 9 and 13x cash flow (depending on your definition of cash flow of course)? In a word, intellectual property. Just like Microsoft has Windows, we have permits and leases. These permits and leases restrict competition and allow us to make out sized profits…for a very very long time. God Bless America.

Gathering myself after landing out the window and on my ear, I would still argue if you care about the long term value of your outdoor advertising company, every once in a while remind yourself, that beside the advertising business, you are in the intellectual property business. Treat those permits and leases like gold. Make sure you catalogue them to the nth degree and place them in a locked file draw. Maybe even fertilize them from time to time.

Wishing you all a Happy Easter and a Happy Passover.

Jim Johnsen

 

jfco.com
Securities transacted through StillPoint Capital Member firm FINRA/SiPC

 

 

 

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