Billboard Mastery Podcast: Episode 69

The Risk/Reward Matrix

Risk and reward are the two main attributes of building or buying a billboard. How these two items interplay yields whether you should build or buy that sign structure. In this Billboard Mastery podcast, we will review how to do this type of analysis and why it’s so crucial in evaluating potential opportunities.

Episode 69: The Risk/Reward Matrix Transcript

Risk versus reward. And a very, very important play between making money and losing money, and one that every billboard builder and buyer must be aware of. This is Frank Rolfe, The Billboard Mastery Podcast. We're gonna talk about just that one item, risk versus reward. Now, what does that even mean? Why would we even waste time talking about that? Well, whenever you're looking at buying or building a billboard, you can't treat all of them the same. Some are risky and some are not. Let me give you an example. Let's assume you went out, you're outside of town, on the state highway, you found a farmer, he's got a piece of land, you cut a deal, you're gonna rent that land from the farmer for 30 years on the initial term of the lease, and you're gonna pay him just a percentage of whatever rent you bring in. No minimum required whatsoever, no chance for development. You're gonna build that wooden telephone pole sign there. That thing is gonna sit there and gonna make you money for 30 straight years. You have almost no risk in that at all. Plus, a sign structure is very, very inexpensive. So all you're gambling is maybe $4000 or $5000 to build the sign. You know you're gonna get your money back over time.

You go out there and you rent the space, you put up the ads, and you let them just make money every day. Change the ads out once every year. That's not a very risky deal. But now let's change that. Let's say instead of that, you're gonna build a steel monopole sign at a cost of $80,000 alongside a train track and your railroad lease is a 24-hour lease, which means they can cancel it on you at any time with 24-hours notice. That's insanely risky. You could put up that sign and three days later the railroad could say, "Oh yeah, you gotta remove the sign. We decided we're gonna expand the tracks." And you're out all your money. And that is why risk versus reward is so important in this industry. Because billboards do have some degree of inherent risk, and correspondingly they come in different shapes and sizes and different price points. So there has to be some consideration given for the risk of the capital that you're spending, whether you're building it from scratch or buying it. Now, one of the dumbest deals I ever did, the world record stupid, was one just like I described. I bought two billboards on a train track property, out by the airport in Dallas. And I paid way too much for them. Back at that time, I paid a $100,000 a piece which was the most I'd ever paid for a billboard, buying it.

And it had a 24-hour termination provision in the lease. So what do you suppose happened? I thought I was a genius. I bought the signs. I got them rented. They're renting for big bucks. They're renting for about $5000 a side. I look like the smartest guy ever for a few months anyway, until the railroad sent me a certified letter saying, "Yeah, we're taking advantage of that ability to cancel your leasing, you come and get them down." Man was that a hit to my ego. I went from a genius to an idiot in no time flat because I had not properly looked at the amount of risk in that deal. I only looked towards the reward of it, how much money I could make with them occupied, how much money I would make if they just kept sitting there ginning money every day? But I never thought about the risk angle. Never thought about the fact that they could terminate me and all that money would go down the drain. So that's why when you're looking at buying or building a sign, you've gotta look at both dynamics, the risk and the reward. And there's a guy named Sam Zell. He's not in the billboard business, but he is the largest owner of real estate in American history. Largest owner of apartments, largest owner of office buildings, and largest owner of mobile home parks ever. He's really old now. I think he's almost 90-years-old.

But he lives by the concept of risk versus reward. And he will tell anyone who will listen that here's how he looks at life. If a deal has low-risk and high reward, you always do it. If a deal has high-risk and low reward, you never do it. And the only ones you ever have to debate is high-risk with high reward. And then you're trying to figure out, is it worth the risk and what will happen to you? Now, what creates risk with billboards? Well, the grand lease itself is, can it be terminated or can the visibility be blocked? There's all kinds of attributes that might make you lose that sign. All your neighbor would have to do, for example, is build a building that obstructs your sign on one side and now instead of a two-sided side, you only got one. There's those type of items. Terminating your lease for development, blockage, it could even be changing direction of the highway, although it's very rare. But I've seen in Dallas alone, Interstate 30 went from being a two-way highway to a one-way highway, then they built the other one-way side years later, significantly far away from it. So those were all the attributes of risk. Also, such features of how much is you're paying for the sign.

If you're building an old wooden telephone pole sign or a crude metal sign out of angle iron, it will be a whole different picture on risk versus reward unless you're building a brand new steel monopole. And even then, we all know steel monopoles come in many, many different shapes and sizes. A center mount, back-to-back, it's a fraction of the cost of a full flag super V. So the cost of the sign is another element of risk that we have to look at. Even the way you build the sign. A wooden sign over time is riskier than a metal 'cause the metal is seemingly will last forever. And then you have weather variations, areas with high levels of wind, maybe possibly a tornado, maybe a hurricane zone. Let's assume you had a billboard that you were buying in an area that has hurricanes. We all know hurricanes have been hitting rapidity about once every year in recent times. That would also go into your total function. The bottom line is, you really have to start looking at every deal you do from the parameter of risk versus reward. And you gotta put it in the two categories, it's either high-risk or low-risk. It's either low reward or high reward. If it is high risk, 24-hour lease in the railroad with a huge upfront cost and low reward, you would never wanna do that deal. It's not worth the risk.

And if it's very low-risk like that wooden sign out in the field with very high reward for the amount of money you put into it, well, of course you'd always do that deal. Why would you not do that deal? You have almost no risk and a huge reward from that. The only ones you ever have to really debate in life are the high-risk versus the high reward. Now, how are some ways you can get a handle on that? Well, I would suggest you break into three categories. Best-case, worst-case, realistic case. And let that guide you in your decision. The best-case would be, what happens if you get the sign fully occupied with the biggest rent you can imagine and you don't lose that sign ever? The realistic case is, what if you get it for less than your dream amount of rents? And then the worst-case is everything bad happens. You can't get the sign rented and/or the hurricane blows it down or the lease gets canceled, you have to take it off. And then you ask yourself, is there any way to mitigate that worst-case? What can I do to mitigate it? Well, you might say, "Well, let's see, if they terminate my lease, I have to take it down. Well, I can take the metal sign and I can move it, but I'll have to leave the part in the ground that cemented in and I'll have the cost over the crane to bring it and take it down and re-put it back up.

So that's gonna cost me, let's say $20,000 and if I paid $70,000 to build it but I can reclaim it all except $20,000 of replacing it. I'll be in the next one for 90, but I can still save the day." That's the way you have to analyze it. You have to look, "Okay, how can I mitigate this risk?" And once you've done your best-case, realistic case, worst-case scenario, that'll tell you the story. I would not wanna do one where my worst-case is financial ruin. So I would never wanna build or buy a monopole sign with a short lease where I can't survive. What happens if they call my bluff and terminate it? So don't do anything on the worst-case that can wipe you out. And of course, the best-case, it takes care of itself. The key question is, are you happy with the realistic case? If you can survive the worst and are happy with the realistic and ecstatic with the best, then you should go forward. The bottom line to it all is that every single billboard deal you ever look at, whether building it or buying it can be broken into these bite-sized components, and that'll help guide you to whether you should do that deal or not. This is Frank Rolfe, The Billboard Mastery Podcast. Hope you enjoyed this. Talk to you again soon.