Affordable Housing Institute : US

Are you sure that’s spelled right?

As the unionized employees of the Boston Globe debate among themselves whether they will accede to the $20 million in annual wage cuts demanded by their owner, the New York Times Company, they might do well to ponder a grim real estate reality, as presented with clinical dispassion by the Boston Business Journal:

The Boston Globe might be worth more dead than alive to the New York Times Company.

A dismantling of the Globe’s assets could yield roughly $85 million.

Worth 85x that dead?

[By the way, Globe management is practicing the classic technique of bipedal-negotiation, about which I'm likely to post later as this drama unfolds. – Ed.]

We’re here to negotiate … or not

Aside from the self-referential local color – a newspaper printing excited stories about its own possible demise – there is, of course, a housing-finance-related point in the challenge of land use. Right now the Globe’s land is being valued based on continued operation ‘as improved’ – that is, as a newspaper – lurking in the background is always the latent possibility of conversion to another use. So the warning is this:

It’s demeaning to be worth more in your body parts than for your soul, but that’s a possibility here:

So say analysts, who believe that the Times may realize more value selling off the Globe’s real estate and other assets than holding out for a buyer for a newspaper that is estimated to lose $80 million in 2009.

Not only is the Globe’s possible demise rooted in real estate, so too is the collapse of its business model, for reasons that would have made Karl Marx smile.

The New York Times Company rattled the Globe to its core with an edict to slash $20 million in costs or shut down by May. [Temporarily extended – Ed.] But that only addresses one part of the equation. The Globe has a revenue problem, too, along with every other metro daily in the country.

The newspapers’ business model is built around a heavy capital investment – in plant and equipment – that in turn mandated geographic concentration (hence the rise of one-paper-town monopolies) and least-common-denominator programming as a means of maximizing aggregate readership, and hence ad rates.

For example, classified advertising – once the cash cow of all daily newspapers – has hit the skids.

Take a look at the classified-ad page displayed below. When was the last time you saw that in your local paper?

Not so long ago, newspapers had pages and pages of these

(Palm Beach Post, 2005)

The Web has killed the newspapers’ business model. It’s not just bloggers creating content, and being fact-checked by swarms instead of by journalism-graduate editors.

The guy in front has the publishing capacity of the edifice in back

It’s not just Google making anything accessible, you have only to type. It’s not just Craigslist and its ilk making advertising free. It’s the entirety of the internet – and why do you take prime real estate in Boston and devote it to a printing press?

Waterfront, access to highways … and you print a newspaper there?

Look at that location! Waterfront views, access to the major highway. Plunking a newspaper’s offices there can’t possibly be the highest and best use.

Once technology created the Web, the cost of publishing high-quality content dropped virtually to zero. So too did the cost of finding high-quality content drop virtually to zero. Although Nancy loves sitting at the kitchen table going through it sheet by sheet and clipping out articles suitable for blog posts, most of us now read the news online. And even she checks out the grocery store ads via the Web rather than via the print.

Newspaper readers happily go to Craigslist.com to advertise yard sales, appliances and lawn tractors for free.

As the cost of delivering ads to eyeballs drops, ad revenue likewise plummets.

Ad rev goes Web …

If the New York Times Company decide to pursue a Web-only version of the paper, it would have to reduce Globe expenses by 90%, Simonton said. He estimated online revenue is only about 10% of the newspaper’s total revenue, estimated between $379 million and $418 million.

The Globe, however, finds itself stuck with a massively expensive fixed cost of delivering the paper. From the physical plant, to the delivery model, to the unionized labor force (430 of whom, listed here, have lifetime-job guarantees), the Globe has invested heavily in fixed assets, meaning that as its revenue shrinks, its profitability drops even faster.

Union representation at the Globe is equivalent to about 70% of the paper’s work force, making it more of a challenge to cut costs.

Because the Globe cannot cost-cut its way to breakeven, it must raise revenue. Yet the technology of the Web is a paradigm-buster threatening to send the Globe the way of Smith-Corona, outflanked by a breakthrough innovation of a more powerful and multi-function tool (the Web). The result is that the whole business model is in jeopardy:

“The underlying real estate may be more valuable than a franchise whose earning power has diminished,” said Tom Corbett, a newspaper analyst at Morningstar Inc. Corbett said he found it near impossible to put a value on the Globe [as a newspaper] because of the absence of recent, comparable deals.

“We couldn’t find a reliable precedent. Nothing is changing hands,” Corbett said.

Depressing though it may be to accept that one’s organs are more valuable than one’s self, that prospect is facing the Globe.

Some analysts, however, said they doubt the New York Times Company will find a buyer who wants the Globe in one piece.

The New York Times Company could cease print operations and sell the land underneath Globe operations at 135 Morrissey Boulevard to a redevelopment group.

In Larry Niven’s World of Ptaavs, he envisioned a future where bootlegging of human organs, organlegging as he dubbed it, was so profitable it was quasi-legal.

My dear, you have two kidneys and no passport

Wouldn’t you be better off with one kidney and one passport?

Less than thirty years after he wrote it, the movie Dirty Pretty Things highlighted the black market in healthy transplant kidneys. (We will not comment on ‘trophy-adoptees’ who seem to be valuable more as photo-op props than as children.)

See my tee-shirt?

The combined assessed value of that property and the 20 acres of real estate at its printing plant in Billerica is $65 million, according to assessor records in Boston and Billerica. The New York Times Company also could parcel out Boston.com for an estimated $20 million according to estimates from analysts.

If the logo has value, why do we need a physical presence?

Compared with the newspaper as a business, the real estate also has multiple other huge advantages as a corporate asset:

1. The real estate has minimal holding costs.

Simonton said the New York Times Company may be more interested in preserving its own liquidity than in propping up the Globe. While the parent company has taken a number of steps to buy time this year and next, it still has gaps in its financing plan.

I’ve reduced by carrying costs … pity about the occupants

Shuttering the paper would preserve liquidity at the Times, which faces a debt refinancing crunch in a few years.

2. More people are likely to be interested in buying the real estate than in running the newspaper.

Now, as you can see, the financial picture is exciting …

In an outright sale of the Globe, Barclays Capital analyst Craig Huber estimates the paper would fetch only $113.3 million. But that’s only if the paper can find a buyer. He uses a multiple of 0.3 on an estimated 2009 Globe revenue of $377.8 million. In years past it was not uncommon to see major newspaper companies sell for 2 to 3.5 times revenue.

Note that the multiple-of-gross-revenue model presupposes profitability is more or less constant regardless of sales. The tenfold drop in pricing (from 3.5x sales to 0.3x sales) reflects the imploding business model.

Undone by economic obsolescence and over-reliance on physical structures

3. Cash flow immediately improves, yielding capital for more critical businesses … like the Times

“While closing down the Globe won’t be a popular decision from a local perspective, improving (cash flow) by $50 million-plus annually could help NYT stock,” said John Janedis, a newspaper analyst at Wachovia Capital Markets LLC.

Les there be any doubt, the Times has taken some of the obvious precautions if one were planning to close a newspaper, starting with writing down the asset’s value:

The New York Times Company bought the Globe on October 1, 1993, for about $1.1 billion. [Snip] In 2006, though, the New York Times Company took a major earnings hit when it recorded an $814.4 million pre-tax charge for the impairment of goodwill and other intangible assets at the New England Media Group, which is dominated by the Globe.

That entity also owns the Times’s share of the Boston Red Sox. The amount allocated to the Globe is likely quite low.

The capital markets are convinced the Times parent is heading for imminent default:

The debt market agrees.

New York Times Company bonds maturing in 2015 are currently trading for 67 cents on the dollar, according to Bloomberg data. With annual yields on that debt now above 13%, buyers of New York Times Company notes are demanding a hefty price for what they see as abundant risk.

I may be desperate, but I’ve got options

Finally, the Times Company has an ace in the hole: since it’s committed to maintaining The New York Times as an old-school, capital-intensive, roll-the-presses newspaper, why keep the Globe as a separate printing factory?

This building is better located … and it’s heavily mortgaged

Why not keep it as a regional or sub-brand?

With New York as the exception, Simonton does not see any US city capable of supporting two daily print newspapers beyond 2010.

Won’t it be ironic if the scrappy and rabblerousing Boston Herald outlasts its haughty neighbor?

Within the Globe’s news operations, editors and reported face gloomy uncertainty with a hope that the newspaper’s intangibles – past Pulitzer Prize glory and the Globe name – will attract a white knight.

Pinch me, I must be dreaming?

To that end, allow me to quote from Larry the Liquidator, eighteen years ago, who though brutal and fictionalized, isn’t wrong:

Where I come from, you always say Amen after you hear a prayer. Because that’s what you just heard – a prayer. Where I come from, that particular prayer is called The Prayer for the Dead. You just heard The Prayer for the Dead, my fellow stockholders, and you didn’t say, Amen. This company is dead. I didn’t kill it. Don’t blame me. It was dead when I got here. It’s too late for prayers. For even if the prayers were answered, and a miracle occurred, and the yen did this, and the dollar did that, and the infrastructure did the other thing, we would still be dead. You know why? Fiber optics. New technologies. Obsolescence.

We’re dead all right. We’re just not broke. And you know the surest way to go broke? Keep getting an increasing share of a shrinking market. Down the tubes. Slow but sure.

Before the Heralds start celebrating, however, another cautionary note:

“And we’re skeptical about the number of markets that can support one daily print newspaper,” Simonton said.

Start the funeral without me?

The real estate moral is blindingly clear. Even when the income-producing value of improved property collapses because of a change in the business, one can change the property’s use. And underneath it all is that uniquely situated land, which always has a recovery value even when the whole business model has crumbled into loss.

And by the way, it pleases me that I am called Larry the Liquidator. You know why, fellow stockholders? Because at my funeral, you’ll leave with a smile on your face and a few bucks in your pocket. Now that’s a funeral worth having!

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