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Buy? Sell? Hold?

May 18, 2015, 09:50 AM by Ben Kaplan
The second article in a series by David Kirshenbaum, SVP of Hilco Real Estate, published in The Inlander.

Perspectives on the value — or liability — of newspaper-owned real estate

Second in a series

On a recent sunny day, visiting a soon-to-be excess editorial and production facility with the third generation co-owner of a Southern newspaper company, the CEO lamented that “our family built the Taj Mahal.” Apparently the success experienced by the industry 10 to 15 years ago led the company to make excessive real estate acquisitions. In addition to the unnecessarily expensive building, this owner bought adjoining land to accommodate future expansion. The fallow field of grass remains—undeveloped.

In hindsight, these decisions appear regrettable.

With a significant correction in the newspaper industry starting in the late 2000s, the face of newspaper real estate began to radically change. With a push for greater efficiency, changes in readership patterns, enhanced outsourcing and persistent margin erosion, the prominence of core and non-core real estate in the capital structure of newspaper companies was brought into heightened focus.

This article, the second in a series, will discuss the perspectives of owners, buyers, sellers, financiers and business brokers/investment bankers on core and non-core real estate ownership and strategies for maximizing value of what is an important asset class for the majority of newspaper operators.

The view from two family owners with multiple properties

TODD SCHURZ, CEO of Schurz Communications, like several of his peers, has been driving his family business toward greater efficiency and a better use of capital.

“As a result of outsourcing printing and inserting in some of our locations, we realized that we have more real estate and square footage than we need for today and for the future,” Schurz said. “As we think about the best use of capital, we think investments in people and intellectual property will generate greater returns than real estate or facilities.”

Accordingly, Schurz, along with his CFO and management team, is overseeing an effort to critically evaluate real estate across Schurz Communications multi-state operating footprint. Selling excess real estate is a strategic and capital enhancement priority.

Will Randall, COO and Chairman of the Board of Randall Family LLC, parent company to The Frederick (Md.) News-Post, has wrestled with real estate-related issues in the context of an overall strategic plan as the newspaper and a related commercial printing business seek a path to a more profitable and efficient future.

The Randall family owns both core and non-core properties that once housed the newspaper’s staff and certain operations. For Will, the vexing question can be summed up this way: “Do we want to be a real estate company or not?” The Randall family has not been shy in aggressively developing a large, state-of-the-art printing and publishing facility in excess of 100,000 square feet in Maryland. There is ample room for future expansion, should that be a path Randall wants to pursue. Third-party tenants occupy a portion of the Randall building, and Will feels very comfortable managing the property as part of his COO duties.

At the same time, the Randalls have two additional non-core properties that once were needed for their business operations. The first is an old printing facility that has been sold to a local hotel developer. Randall considered partnering in the deal, but determined that a minority position in a deal with no real control was not a sensible use of time or capital.

The second non-core property is their former headquarters, located in a suburban shopping mall still controlled by the family. Randall is considering his options because—unlike many former newspaper-related properties—this mall has a continuing income stream that makes holding it less risky and more financeable.

The view from market makers

RANDALL AND SCHURZ REPRESENT a large swath of industry players who are multi-generation newspaper companies with a significant investment in real estate assets.

A more institutional investor is Joe Miller, President of Twenty Lake Holdings (“TLH”) which focuses primarily on newspaper facilities as an owner, manager and advisor. TLH owns more than 1.5 million square feet of such properties and has worked with several national media companies and private equity firms on a myriad of newspaper property dispositions and acquisitions. Typically, multiple newspaper properties are included in TLH’s sale or sale lease-back transactions.

Miller says he believes that “every piece of property has some intrinsic value.” For TLH, smaller properties added together can unlock value. Miller believes that it is important for newspaper companies to disaggregate the newspaper and real estate assets in the sale process. “Since multiples are low in the newspaper industry, separating out the real estate assets and monetizing the building apart from the newspaper itself can be accretive (to the sale process),” he said.

Operating a newspaper and optimizing the company’s assets, real estate and otherwise, is the quotidian concern of most newspaper operators. However, with the market for newspaper companies transitioning from moribund to more active, the question of real estate’s role in both ongoing financing and the possible sale of newspaper companies and related properties is an issue of enhanced evaluation and focus.

As relates to the financing of a newspaper sale, industry experts agree that real estate is a big plus for financing purposes. As Chuck Dreifus, a financial advisor to traditional media companies, says, “Banks like bricks and mortar as part of an overall financing package. It is a clear positive.” Two key components of the inclusion of real estate in any financing package is that the rate on real estate debt tends to be lower and the amortization, or pay off, period tends to be longer—in some cases by a factor of two to three times.

Veteran newspaper brokers Gary Greene, Larry Grimes and Owen Van Essen concur in this thinking.

Gary Greene of the merger and acquisitions firm Cribb, Green & Associates sees real estate sometimes included in a deal, and sometimes not. “In some cases owners want to hang on to the real estate when they exit the business. It varies from deal to deal,” he said.

“Lenders put an important emphasis on ‘bricks and sticks’ because purely cash-flow lenders are few and far between,” observed Owen Van Essen of Santa Fe, N.M.-based Dirks, Van Essen & Murray. He added that if there is no real estate in the deal, “the seller will lose potential buyers because some buyers will not achieve the level of leverage to make a successful deal possible.”

From Gary Greene’s perspective, “lenders are looking for cash flow and EBITDA from a company first and foremost.” And according to Larry Grimes of WB Grimes & Company, there are several active newspaper acquirers that simply don’t want real estate as part of the deal, which can create angst for sellers looking to exit the business and shed the associated real estate. If the buyer can manage to finance the deal without buying the seller’s real estate as well, flexibility and nimbleness is enhanced while capital outlay is shrunken and can be allocated to other more productive uses/asset classes.

The art of financing newspaper real estate

ALL OF THE MARKET MAKERS agreed that newspapers and other traditional media outlets are out of favor from a finance perspective.

Given this reality, more buyers and sellers are forced to rely on local banks where relationships run long, sometime over the course of several generations. For Dreifus, a seminal question that any buyer must answer before undertaking an acquisition is “what is the financing goal and what level of risk is a buyer willing to assume” in the process? For some, a personal guaranty that puts other assets at risk is the only alternative. Many owners/investors will not agree to take on such a liability. Having a financial expert or business broker as an ally in the process can therefore make a substantial impact on the smoothness and potential success of the process.

Looking upstream to larger, city center dailies, similar pressures exist with regard to how core real estate fits in the ongoing operational and financing strategy of several big players. According to Larry Grimes, city center real estate which has been on the books for years, if not decades, can be used to help carry and sustain a newspaper’s operations. Larry cited newspapers in Charlotte, Miami and other major cities where maximizing the value of core real estate through sale or sale lease back allowed proceeds to be deployed to newspaper operations, to finance new equipment or to pay down debt.

But these sales are not always easy to execute as owners must wrestle with the optimization of their future real estate needs while being mindful of potential environmental issues of decades-old facilities.

Another issue facing sellers who need to lease back space in order to operate—in a classic sale lease back, or SLB, transaction— is the diminished credit ratings of several larger newspaper companies. The market for such deals (and as a result the price that can potentially be garnered for any asset) is directly correlated to the credit of the seller/tenant. If credit is weak, the capitalization rate used by the market will be higher and the proceeds to seller will be lower—in some cases, significantly lower. An SLB transaction with wounded credit can be the real estate equivalent of a Pyrrhic victory.

Easy answer for non-core real estate: take it out of sales equation

NON-CORE REAL ESTATE, on the other hand, is seen by all of the industry experts interviewed for this article to be a value-detracting albatross that should be kept out of any sale process.

For Gary Greene, the thought process is simple: “Sell your excess real estate apart from the company, as buyers don’t want it and will significantly discount it in any bid.” Larry Grimes agrees, stating that several buyers in the market “just don’t want the seller’s excess real estate. They have their own space and their own ideas on how best to consolidate existing and newly acquired operations.” Finally, Van Essen adds that unnecessary adjacent land and buildings should be jettisoned in a sale process “if it is not directly adding to the functionality of the newspaper and is not key to ongoing operations.” Gary Greene’s advice is to “retain a local or national real estate expert to help strategize and monetize” noncore real estate assets prior to the sale of the core newspaper business.

While Dreifus agrees that non-core real estate is an “inefficient use of capital,” he sees a silver lining with regard to some former multi-use printing buildings. Specifically, former printing facilities can be converted to other uses such as data centers because the buildings typically have high ceilings, reinforced floors, significant power sources and other attributes certain users covet. Unfortunately, not all such properties are easily snapped up by investors.

The takeaway

For newspapers, like other industries in transition, “necessity is breeding creativity” regarding excess real estate assets according to Dreifus. As newspapers fight to thrive, real estate is a key component in the transformational process. As a result, newspaper companies will continue the trend of analyzing and optimizing their core owned real estate while jettisoning or critically evaluating the place for unneeded assets in the capital stack. There seems to be a strong consensus among owners and investment professionals alike that if you don’t need the real estate--why keep it?

The author David Kirshenbaum is senior vice president and head of the Corporate Services practice at Hilco Real Estate LLC (www.hilcorealestate.com) located in Northbrook, Illinois. The company is a unit of Hilco Global, a provider of a wide variety of valuation, monetization and advisory services for the printing, publishing and other industries. Hilco’s services include lease restructuring, real estate sales, property tax advisory, equipment liquidations and asset appraisals. David Kirshenbaum can be reached at dkirshenbaum@hilcoglobal.com or (847) 504-3220.

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Source: The Inlander

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