Los Angeles Bans Billboards

The Los Angeles City Council voted unanimously to ban all new billboards in a city that currently has approximately 10,000 such structures. The Council also rejected proposals by the industry to erect 50 new billboards along high traffic volume freeways in exchange for removing about 2,500 signs on low traffic volume surface streets. Most of the Council members hailed the ban as the first step in raising the image of the city and reducing visual blight. There are at least 1,000 other communities and six states in the U.S. that prohibit new billboards.

Officials have also started planning a program to create and maintain an inventory of all billboards in the City, and remove illegal structures. The recently launched auditing system to detect illegal signs is intended to eliminate billboards that do not have permits. Additional proposals to control outdoor advertising include raising annual permit fees. The current fee level is nominal and does not come close to covering the cost of the monitoring effort that many citizens desire. Higher fees could provide the funding of the City’s efforts to begin keeping track of billboards.

The billboard industry’s offer to swap 2,500 signs on less traveled roadways for 50 new billboards at freeway locations was rejected, but it demonstrates the importance of traffic volume on billboard value. Signs on high-volume freeways are clearly worth more than similar signs on side streets with much lower traffic. We analyzed the proposed swap to gain insight to factors that drive billboard value.

The ratio of signs to be removed compared to new signs is 50 to 1 (2,500 to 50). On its face, this would indicate that some signs are worth 50 times more than others. How does that compare to traffic counts? Some freeways in Los Angeles carry 300,000 vehicles per day, while arterial streets often have volume from 20,000 to 50,000 vehicles. Assuming that the sign companies would have removed signs on the lowest-volume streets, it can be argued that the average traffic count of the relinquished sites would be 30,000 vehicles per day. This means that the ratio of traffic gained to traffic lost is 10 to 1 (300,000 to 30,000). That ratio accounts for some of the 50 to 1 trade off in removing old signs, but not all of the difference.

Other factors that would make a 50-to-1 swap attractive to billboard companies include size, demographics, and visibility. First, if the billboard companies had free choice in identifying the signs to be taken down, they probably would have included smaller displays called Junior panels. These signs are normally 6 feet high by 12 feet wide. Advertisers pay much less to display their message on these signs than on the large 14 X 48 billboards normally seen on freeways. Thus, the size of the proposed new signs is 8 to 10 times the size of many of the signs selected for removal. Second, the likely candidates for removal might also tend to come from lower income neighborhoods. These locations are often the most difficult to sell to advertisers because of the lower buying power of local residents. Billboard operators often display public service messages in these areas because they cannot easily sell the space to paying advertisers. Consequently, the signs given up would be low-income and low-occupancy, whereas the new freeway signs would be high-income high-occupancy structures. Third, the signs selected for removal would probably have included display faces with obstructed or limited visibility. These signs tend to have lower values even if they are located on high-traffic streets. Advertisers are not willing to pay full rates if their message is not easily seen by passing traffic. Finally, all of the 50 new signs might have had two faces, while some of the removed billboards may have had only one face.

Our analysis did not result in a clear mathematical allocation of the reasons for the proposed 50 to 1 swap of billboards. It can be attributed to multiple factors including traffic count, size, demographics and visibility.

The Supreme Court of Georgia decided that a billboard owner must be compensated for a sign that could not be rebuilt after being damaged. A sign in Cobb County, Georgia owned by Outdoor Systems (now Viacom) was damaged by a tornado. The County had previously adopted an ordinance that prohibited any new off-premises signs, but allowed existing structures to remain subject to certain conditions. Section 134-346 of the ordinance provided that non-conforming signs could be maintained and minor repairs could be performed. “Minor repairs” in many jurisdictions is often taken to mean expenditures of less than 50% of the cost to rebuild the sign. Signs destroyed or toppled by an Act of God do not receive a variance to be rebuilt in most cases, including Cobb County. This is a common provision of sign codes throughout the nation.

In this ruling (274 Ga. 606, S01A0859. Outdoor Systems, Inc. v. Cobb County et al.), the State’s Supreme Court decided that the County must pay full compensation for an eminent domain taking because approval to rebuild the sign was denied. Although this case involved certain highly technical issues not dealing with compensation, the end result is that the sign owner will receive compensation for the sign.

The effect of this ruling on signs in other jurisdictions is unclear. Certain points in this case can be used for arguments in other cases involving prohibitions on rebuilding signs. It is possible that other courts may come to a conclusion similar to that of the Georgia Supreme Court. Or, the technical aspects of this decision may be case-specific, and not applicable across a broad spectrum of cases in other jurisdictions.

Total advertising spending in the US was down 0.4% in the first quarter of 2002 according to CMR, an ad-tracking unit of Taylor Nelson Sofres Co. The performance would have been even worse except for the boost in spending by advertisers during the Olympics in Salt Lake City this year. Ads on TV for the Olympics generated an extra $5.5 billion, or 6.2% of total television revenue. A specific breakout of spending for outdoor media was not available, but CMR reported cable TV ads were off 16%, newspapers fell 9.3%, and on-line advertising was down 14%.

The reasons for declining ad revenue in a recovering economy were analyzed by Zenith Optimedia Group, the world’s fourth largest global media services agency. Zenith Optimedia reported their analysis of worldwide ad spending in a recent press release.

The advertising recession has been caused by a collapse in corporate confidence and profits. Consumer expenditure normally correlates closely to ad expenditure, but this time consumers have continued to spend throughout the downturn, as their confidence has been buoyed by cheap credit and rising house prices (except in Japan). But advertisers have had their margins eroded by fierce price competition, and in many cases by the need to write down assets that have fallen sharply in value, so they have cut back on advertising as well as other expenses to protect reported earnings.
It is striking that ad markets are becoming more gloomy just as economists have started to revise their forecasts upwards.

[w]e are forecasting decline in ad expenditure in 2002, and at least another two years when advertising growth will under perform GDP.

This is precisely what happened in the previous recession. Then, ad expenditure suffered a much sharper downturn than the wider economy in our top seven markets, and took longer to recover. This is the price ad markets pay for outperforming the economy during periods of confidence and growth; they are paying it again now…

Zenith Optimedia is forecasting a decline of 1.8% in advertising revenue in 2002 for the US. This will be followed by a rise of 2% in 2003, and growth of 4.2% in 2004. Advertising media companies will welcome the return to normal growth rates by 2004 if the forecast is realized. The expected advertising revenue of $140.9 billion in 2004 will still be short of the $144.4 achieved in 2000. That record level was set by two non-recurring forces. Dot.com ad spending had not entirely collapsed by that time, and the telecom companies were still spending with abandon. Advertising today is much more balanced across industry segments.

Billboard companies have seen a larger decline in spending by national advertisers than by local and regional businesses. This is due partly to the need by local businesses to let travelers know where they are located. Restaurants and motels depend on their freeway billboards for customers and they do not cut back on this type of spending unless absolutely necessary.

Some of the billboard companies that courted the large and profitable national accounts in the late 1990s are shifting gears and going after more local accounts. They have redirected their sales forces to fill blank faces with ads from local merchants. Local and regional sign operators that never abandoned the smaller advertising accounts are now in a better position to hold their customer base.

Lower ad revenue tends to mean lower billboard values. Since most buyers and sellers establish a price for a billboard plant based on its revenue, lower revenue means lower value. If sellers know that their plant is worth six times revenue, and revenue is lower than in previous years, the effect on price is obvious. In addition, some acquirers set their purchase price according to expected revenue and earnings in the forward 12 months. With revenue expected to decline, pricing models are coming up with lower prices. There are always exceptions, but in general lower revenue means a tendency toward lower billboard values.

Lamar Advertising Company reported an increase in revenue of 3.6% for the first quarter of 2002 compared to the same period in the prior year. Sales rose from $170.4 million to $176.5 million. The increase came mostly from acquisitions of billboards during the previous 12 months. On a “same store” basis, which reflects the growth in revenue on signs owned for longer than one year, the Company reported that revenue was up 1% for the first quarter. Lamar also reported an improvement in net earnings, or rather, less of a net loss. During the first quarter of 2001, the company lost $34.4 million in a very bad advertising market. Lamar’s results improved in the first quarter of 2002 when the net loss was reduced to $16.2 million. Part of the benefit came from lower depreciation expenses, which dropped from $85.4 million in 2001 to $67.1 million this year.

The earnings measure known as EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) was down in dollars and as a percentage of revenue. EBITDA dropped from $71.2 million in 2001 to $68.1 million in the current year. The margin shrank from 41.8% to 38.6%.

Management at Lamar is cautious about the outlook for 2002, but is beginning to see some improvement in its business. During the past 18 months of declining ad revenue throughout the industry, management began to watch changes in sales and occupancy on a monthly basis. While it is normally better to take a longer-range view and focus on quarterly changes, monthly results provided a close monitoring of market conditions during the recession. According to the monthly figures, management reports that a turn around appears to have been achieved in the first four months of 2002. Aggregate same-store revenue was down in January 2002 from the same month in 2001, giving no indication that an improvement had started. However, February revenue this year was down less than the drop for January. By March 2002, sales were even with the prior year – the market appeared to be stabilizing. In April 2002, revenue was actually up 1.5% over the same month in 2001. One month does not make a trend, but the market has shown some signs of improvement. The strongest markets for Lamar are in the northeastern U.S. and the Midwest. It is too early to declare the recession dead, but the trend appears to be improving at Lamar.

The company reports that the apparent improvement is also reflected in higher pre-sold inventory for the year. At the end of the first quarter of 2000, before the market weakened later in the year, the company had pre-sold 74.3% of its goal of selling available faces for the year. At the same point in 2001, the percentage dropped to just 69% of goal. Like most advertising media companies, Lamar had excess capacity. At the end of the first quarter this year, the company had pre-sold 73.3% of its annual goal, which is about the same as at the same point in 2000. Management states that occupancy in April 2002 was 63% on Posters and 74% on Bulletins, both up from the average for the first quarter.

The improvement for Lamar is coming from more advertising dollars spent by “Main Street” than by “Madison Avenue.” Much of the company’s billboard plant is located in medium-sized and smaller towns compared to its competitors Viacom and Clear Channel. The smaller businesses in Lamar’s market are beginning to advertise more. Many of the large national corporations have yet to open the purse strings again and start expanding their advertising campaigns. The difference between local advertisers and national advertisers has helped Lamar relative to its competitors.

Lamar completed 26 transactions totaling about $76.2 million in the first quarter of 2002, including many small deals as in the past. They reported that the average cash flow multiple was less than 10 times forward EBITDA and approximately 5.35 times revenue or (effective gross income). Management reports that they are not dealing with many distress sellers, as might be expected in an economic recession. Smaller billboard plants in local areas are often owned by successful entrepreneurs who understand the value of their businesses. Lamar is not only the most active acquirer of such plants, the company also has access to capital markets that will allow the acquisitions to continue. Sellers know that Lamar is a qualified buyer. Management’s plan is to spend approximately $200 million per year on acquisitions. While this averages about $50 million per quarter, taxes and other reasons usually make the fourth quarter slower and the first quarter busier than the others. The 15% of the billboard industry not already owned by the three largest companies probably represents about $2.5 billion to $2.7 billion in market value.

Management expects its acquisitions to boost the Company’s profit margin. Many of the sign plants that Lamar is buying are fill-in acquisitions in areas where the company already has billboards. This allows the new signs to be added to inventory and generate incremental revenue, without generating as much incremental expense. Existing expenses for sales and administration do not have to be raised substantially for the new signs. Management estimates that the profit margin contribution on fill-in or tuck-in acquisitions is around 65% of the acquired revenue. To the extent that this target can be achieved, the company’s overall EBITDA margin should widen with the acquisitions.

The company’s new digital image signs, or video billboards, are still in the test phase. The sign erected in Pittsburgh is reported to be generating about $45,000 per month in advertising revenue, while the sign in the company’s hometown of Baton Rouge is generating between $13,000 and $15,000 per month. The market for these signs is still being developed in terms of the best use for the medium. Advertisers with time-sensitive materials may be in the best position to use such a sign. The message can be changed instantaneously so news or price changes can be posted immediately. This can be an advertising opportunity for grocery or drug store chains. It may take time for Lamar to explore the full range of benefits of these signs and develop a customer base that will provide consistent demand for the space.

On April 4, 2002, Florida Governor Jeb Bush signed house bill 715 into law, which requires local governments to pay just compensation to billboard owners when they require the removal of billboards within their jurisdictions. The Governor stated, “The taking, whether direct or indirect, of private property is serious business. It should require extraordinary effort on the part of government to effectuate. Imagine a government that could amortize your home or your business as a means of taking your property.” The bill had previously passed the House by a vote of 91 to 17 and the Senate by a vote of 29 to 8.

The new law provides for a nonbinding arbitration panel to come up with a list of roadways where the billboards can be relocated. If the billboards cannot be relocated the local government must then compensate billboard owners. Compensation has typically ranged from thousands of dollars to hundreds of thousands of dollars. An article in the St. Petersburg Times reported that, “in recent years, the average billboard in Florida has been appraised at $3,000 for tax purposes in contrast to the $120,000 billboard owners claimed when governments tried to condemn them.” This statement reflects a major contradiction faced by billboard owners as a growing number of communities are starting to call for billboards to be valued the same for taxes as they are for condemnation.

Local government representatives were not happy about the Governor’s decision. Orange County officials estimated the new law could cost the county $13 million. Pasco County Commissioner Steve Simon said, “I’m not going to pay the kind of money they are talking about.” The City of Orlando had previously passed an ordinance requiring all billboards to be removed from city streets by 2007. The new law will likely stop Orlando from removing over 100 signs without paying just compensation. Orlando officials were hopeful that they could still reach an agreement with billboard owners but conceded that the new law would leave them without much negotiating influence.

Governor Bush acknowledged the decision was not easy saying, “This issue is especially difficult since I am a firm believer in both local control and property rights.” He said the bill “strikes an adequate balance between important principals.” Representative Suzanne Kosmas, D-New Smyrna Beach, supported the bill even though she had strong pressure from County officials. Rep. Kosmas said, “It’s a private property-rights issue 100 percent. If a city wants something whether land for right-of-way or preservation it should be paid for. If they wanted to make it a priority, they would.”