A Digital Sign Home Run

I'm skeptical about digital signs due to the high upfront costs but here's a real life success story from one of my clients.  This one-sided 10X24 digital sign cost $135,000 to construct.  It's on a road leading to costco.

 The sign generates revenue of $4,560/month which works out to $570 per each of 8 flips.

 Monthly expenses are $350 ($100 rent, $150 electricity, $50 insurance, internet $50).

 Cashflow (EBIDTA) is $4,210.

The manufacturer says the sign has a life of approximately 100,000 hours which works out to 11.4 years at 24 hours a day operation.

The IRR on the project is 36%.

Two things make the project a home run.

 First, the sign's owner sells the advertising.    If the owner used a sales rep or agency and paid a 20% sales commission the sign would cashflow $3,298/month for a 27% return on equity.  Second, the sign lease is fixed as opposed to being a % of gross revenue.  If the lease was 20% of gross revenue the sign's cashflow would be $3,398/for a 28% IRR.  If you assume both a 20% sales commission and a 20% of gross sign lease then cashflow on the sign is only $1,722 for a 11% return on equity.

The takeaway: lease and sales costs can have a huge impact on sign economics.

Are Digital Billboards a Good Investment?

I am making lots of loans for digital billboards.  Digital billboards make sense in markets where there are no new sign permits (you can have up to 8 advertisers on face sign) and in urban markets where high rents are possible.  A regular 14 by 48 billboard, however, will offer a better return on your capital due to the lower upfront costs.

Here is the return on capital for a simple two sided 14 by 48 billboard:

• Construction cost is $40,000.
• Useful life of the board is 20 years.  This is a very conservative assumption.  I've heard of 30-40 year lives of some steel monopoles.
• Revenues are $2,500/month consisting of $1,250/month for each side.
• Expenses include sales commission ($500/month or 20% of revenue), land rent ($500/month or 20% of revenue), electricity ($100/mont) and insurance ($45/month). 

This results in a cashflow of $1,355/month or $16,260/year on an investment of $40,000.  The IRR is 40%/year over the 20 year life of the steel sign.

Here is the return on capital for a digital billboard:

• Construction cost of $270,000 for a one sided digital billboard.
• Useful life of the board is 7 years.  I have heard of some estimates that the useful life of signs is closer to 5 years.  The sign may last longer than that but you will be pressured to replace it within 7 years in order to stay up with the latest technology.  I've seen digital signs which are older than 10 years and they look tawdry compared to new signs.
• Revenues are $8,750/month assuming the sale of 7 of the 8 possible flips at $1,250/month.  I've assumed that one flip is always vacant.
• Expenses include sales commissions ($1,750/month or 20% of revenue), land rent ($1,750/month or 20% of revenue), insurance ($45/month), electricity ($200/month) and internet connection ($45/month).

This results in cashflow of $4,960/month or $59,520/year.  The IRR is only 13%/per year over the 7 year life of the sign due to the high upfront capital cost.  The IRR drops to 4%/per annum if the sign has only a 5 year useful life.  To generate a 40%/year IRR you need to generate at least $20,000/month from the digital sign.

Conclusion:  Use digital only at your best locations where high rents are possible.  A digital sign won't make a bad location good and will probably make a fair location bad when you look at the return on capital.

Does a Digital Billboard Make Sense?

I have seen strong demand on the part of clients for digital billboard financing.  Digital billboards make sense for good locations.  A digital billboard, however, will not make a bad location good.  Here are the pros and cons of digital billboard.

Digital Billboard Pros

Extra revenue.  Instead of getting $1,500/month in revenue for a 14 by 48 billboard you can get $6,000-8,000/month by renting 6-8 flips at approximately $1,000/month.

Remote management.  You can change copy via the computer instead of having to pay $350 to put up vinyl each time you change an ad.  You can also monitor the boards performance via the computer instead of having to physically inspect the sign.

Public Service Ads.  A digital board can help you create goodwill in your community by running amber alert ads or using unused inventory for public service ads.  You can change copy easily and cheaply.

Digital Billboard Cons

Extra Capital Cost - A digital billboard will cost $200,000-250,000 to purchase and install.  That's approx 6 times the cost of a regular billboard.  The extra cost means you should only convert your best locations to digital.  

Obsolesence - You should assume that a digital billboard will have a 10-15 year useful life.  By the end of that time you will probably need to replace it because it will be technologically out of date.  Think about how poor the digital signs which are 15 years old look versus the current generation of signs.  

Extra electricity - A digital sign will be more expensive to light than a regular billboard.