Emmis Communications: Selling Below Net Cash, Mediaco Holdings

Emmis Communications (EMMS) is a micro-cap (~$50MM) radio broadcaster that recently sold their two popular New York radio stations (substantially all of their remaining operating business) via a creative transaction (which is interesting in its own right, more on that later) leaving Emmis as a cash pile and some miscellaneous assets that is currently trading at 60% of net cash.

Emmis has a long history in radio, it was founded roughly 40 years ago and is still run (and controlled via super-voting shares) by CEO Jeff Smulayn, they've done many radio station M&A deals as both a buyer and more recently a seller in the past but in recent years made the strategic decision to effectively exit the business.  Radio is a mature industry but slow-to-no growth as it is increasingly being competed against with superior on-demand products like music streaming and podcasts.  The few times I have the radio on in the car, I usually cringe at how terrible the listening experience is or how ridiculous it is that in 2020 we're still giving out weather and traffic every ten minutes.  Podcasts and streaming services are also getting quite good at targeting ads, I was recently listening to a highly popular podcast and received ads for a car dealership down the street from me -- radio's local advantage is overstated.

But back to Emmis, it now has the following assets:

• ~$88MM in proforma cash after taxes and other costs of selling the New York radio stations
• 5 radio stations, four of them are in Indianapolis (local ESPN sports talk affiliate, soft-adult FM that's #2 in the market, a country station that's #3 and a news/talk channel) and the other is an urban gospel channel in New York that's way down the ratings table.  Too much noise in the financial statements to determine what these are worth, but I doubt Emmis sells the Indianapolis stations anyway - there's likely a lot of social status that comes with being a media executive in your hometown, so I don't see Jeff Smulayn divesting these.
• A licensing agreement with Disney for WEPN-FM in New York, which is the ESPN radio affiliate in the market, Disney is contractually obligated to pay the $42MM in debt associated with that station by 2024 and the debt is non-resource to Emmis.  This arrangement hides the true net-net position of Emmis.
• Their headquarters building, 40 Monument Circle in Indianapolis, its just under 100k sq feet and was built in 1998 for $25MM.  They do have a $13MM mortgage loan with their headquarters and an additional 70 rural acres in Whitestown, IN (yes, an actual place) collateralizing the loan.  This is their only real debt remaining.
• $5MM convertible note with Mediaco (MDIA) and they'll also be receiving $9MM in working capital from Mediaco, plus a $1.5MM/year fee for continuing to run the stations

Taking a fairly conservative view of the assets and I come up with Emmis trading at an adjusted enterprise value of -$64MM, or said another way, trading at $3.75 despite having $6.34 in net cash per share ($88MM + $9MM WC from Mediaco - $13MM mortgage debt).

Why is it trading at such a discount to net cash with no value to their other assets?  Well for one, the operating expenses and overhead of the remaining business are such that there is now a quarterly cash burn.  But more importantly, it is a legacy media company with a controlling share class structure, Jeff Smulayn owns all of the Class B shares (and effectively none of the publicly traded Class A) giving him a majority of the vote while only owning ~10% of the economic value of Emmis.  He has outlined a vague plan to buy a "growth business" outside of radio, kind of fashioning Emmis has a middle market PE buyer with its new found cash balance.

That's certainly a bit scary and almost SPAC like in nature, but what I think is potentially more likely and more appropriate for Jeff Smulayn to do is a large tender or take the company private and pursue that family office strategy outside of the public markets.  What's the logic in keeping the controlling structure in place when it is now effectively a SPAC?  The argument behind the legacy media control structure should no longer apply; seems inappropriate and an abuse of minority shareholders.  He tried to take EMMS private in 2016 but couldn't come to agreement on price with the board, I think he might try it again, if not, shares are pretty cheap at just 60% of net cash.

Mediaco Holdings (MDIA)

Potentially more interesting to some -- as part of the sale of the two New York radio stations (Hot 97 and 107.5 WBLS), a new company was formed controlled by Standard General LP, a hedge fund that has historically done well in media sector.  The new company, blandly dubbed Mediaco Holdings (MDIA), is a tiny microcap at this point, the Class A public float that was distributed to EMMS shareholders is around $11MM (Class B is 100% owned by Standard General), but the stated strategy is to pursue an M&A fueled growth strategy looking at "off-the-run" deals in the media space.  The first one was with Emmis and they recently completed another deal funded with debt and convertible preferred stock to buy a billboard company.  The trading dynamic kind of reminds me of Five Star (FVE); Mediaco's current public float was distributed as a taxable dividend to Emmis shareholders on 1/17 as a tiny fraction of their holding in EMMS.  It has traded erratically since the spin/distribution, but Standard General effectively paid ~$7.75 per share for their super-voting shares in the New York radio station deal, although they do have converts and other economic interests that aren't aligned with minority shareholders it still could be interesting well below that price.  Standard General seems to agree and actually bought some of the Class A shares in the open market in the past week:

MDIA is so levered (EV is about $153MM versus a market cap of $47MM) that it is not going to be cheap on an EV/EBITDA basis against radio or billboard peers, but might be on a FCFE basis and is essentially investing in a quasi-public private equity media fund.  I haven't found a website for Mediaco yet, but they did publish an investor deck to Edgar for those interested.

Disclosure: I own shares of EMMS and an insignificant amount of MDIA

Five Star Senior Living: Reorg with Spin Dynamics

*This one ran away from me a little bit today but still likely cheap, wrote most of this last night after @valuewacatalyst (probably my favorite follow) tweeted on the idea and reminded me that the distribution had just happened, but below is the thesis -- interesting situation that's worth keeping an eye on or looking for something similar in the future*

Five Star Senior Living (FVE) is an RMR Group (RMR) controlled operator of primarily independent and assisted living communities for Diversified Healthcare Trust (DHC), which is RMR Group's externally managed senior housing and medical office REIT that was formerly known as Senior Housing Properties Trust (old ticker: SNH).  RMR manages a series of REITs and doesn't have the best reputation with investors, there's an obvious conflict of interest present in most external REITs, we last ran into RMR when they purchased the net-lease retail assets of SMTA for RMR's hotel REIT, Hospitality Properties Trust (HPT), their incentive is growth regardless of price or fit.  Their agreement with FVE is similarly structured, RMR gets a 0.6% cut of revenues without paying attention to profit.  Everyone knows the demographic tailwinds that should support the senior housing sector, the population of those 75 or older is growing at 2-3x the rate of the overall population in the United States.  Developers got excited, overbuilt in recent years into this well telegraphed demographic trend and senior housing operators have struggled due to the oversupply of rooms.  However the trend might be improving, construction is a little more rationale now and each year we move forward the demographic wave of seniors gets closer to being realized.

Five Star has been on the brink of collapse a few times (it was originally a spin of DHC 15+ years ago), they've been hampered with a poor business model of both high operating leverage (labor is expensive and often semi-fixed regardless of occupancy levels, insurance premiums, private vs public pay, etc) and high financial leverage via leasing their properties on a triple net basis from big brother Diversified Healthcare Trust.  They couldn't survive the oversupplied market and their troubles have bled into DHC's share price as well.  Through a restructuring with their largest creditor DHC, which is akin to a pre-packaged bankruptcy reorganization, Five Star will now be primarily an asset-lite operator of senior housing and the capital requirements will be DHC's responsibility.  The new structure is very similar to what is used in the hotel REIT industry where the REIT owns the property but in order to qualify as a REIT, the REIT needs to hire a third party management company, that's going to be Five Star going forward, switching from being DHC's tenant to their hired hand.  The primary difference, in the hotel industry the best revenue stream is the brand/franchise royalty, the Five Star brand isn't Marriott, so its just the less attractive but still a decent enough business of managing the property component in this situation.  In return, DHC received about 85% of FVE equity and distributed about 51% of the proforma shares outstanding to DHC's shareholders via a taxable special dividend, keeping the rest on DHC's balance sheet.

Five Star's new management agreement is for 5% of gross revenues plus the opportunity to earn another 1.5% of revenues in incentive payments if certain property level EBITDA targets are met.  FVE management is guiding to $20-30MM in EBITDA this year, even putting a 4-5x multiple on that and the stock could be a double from here.  The company has essentially no significant conventional debt following the restructuring, they will have a few remaining owned properties that carry mortgages but its pretty minor, a few non-DHC leases and a self insurance liability that is backed by their marketable securities portfolio.  Following the share issuance and sale of fixed assets to DHC, Five Star has approximately $100MM in proforma cash (this will likely not be all cash but a receivable from DHC for working capital liabilities, but eventually will be cash **EDIT: apparently this is wrong, being told that cash will be ~$35-40MM**), not far off from the proforma market cap of $112MM (31.1 million shares using a $3.60 share price).  Even at a 4x multiple of $25MM in the mid-point EBITDA range, the business is worth $100MM plus the $100MM in cash, FVE could be a $6+ stock without a demanding valuation.

Why does this exist?  DHC's shareholders are primarily retail investors who are hungry for yield or REIT index funds, few fundamental institutions would continually want to suffer the abuse of owning an RMR externally managed REIT.  The distribution of FVE shares was especially small, on 1/2/20 for each share of DHC, DHC shareholders received 0.07 shares of FVE, meaning it's likely an automatic sell due to its insignificant size and its 0% dividend yield (or if it's a REIT index fund holder, it would no longer be in the index).  Five Star has plenty of red flags, but the combination of a reorg to a better business model and the spin like dynamics of placing the new shares in disinterested holders makes it an interesting near-to-medium term opportunity.

Disclosure: I own shares of FVE