Emmis creates option to sell, lease back HQ

Would embattled Emmis Communications Corp. sell its Monument Circle headquarters, a prized development that opened a decade
ago at what then-Mayor Steve Goldsmith called "the most important site in the city and the very center of Indiana?"

Emmis Chief Operating Officer Patrick Walsh
said there are no plans to do so. Yet the debt-drenched company is keeping its options open. When it
amended terms of its lending agreement last month, it negotiated the right to do sale-leaseback deals
on its two most valuable real estate holdings— its headquarters and its broadcasting-tower site on Flint Peak in Los
Angeles.

"We asked for this as kind of a throw-in at the 11th hour," Walsh said. "It’s something we have in our back
pocket if we need it down the road."

However, he added: "From what I am told, this is about as bad a commercial real estate market
as people in that business have ever seen. I think it would be a miserable time to even look at that."

CEO Jeff Smulyan was ebullient when he opened
the 140,000-square-foot, seven-story building on the southwest quadrant of Monument Circle in December
1998. It was the first major Circle project since Anthem opened its headquarters in a renovated building
on the northwest quadrant in 1992.

The city provided the site, once pegged for a third Circle Centre mall anchor department store, to Emmis for a nominal cost.
The company invested $15 million to create a showpiece that befit the location, with amenities such as 16,000 square feet
of terraces and atriums.

But those were headier days. Now, Emmis is putting almost everything on the table as it battles what it calls "an incredibly
weak" ad market. This month, it sold the company jet for $9.1 million and announced a deal to lease a struggling L.A.
station to Mexico’s Grupo Radio Centro for $7 million a year. Under the pact, Grupo Radio Centro can
buy the station outright for $110 million.

Deep in debt

Emmis’ principal challenge: The company is saddled with more than $400 million in debt. Though
most of it doesn’t come due until 2013, analysts say Emmis’ eroding performance puts the company at risk
of violating covenants of its lending agreement, perhaps within months.

The company negotiated last month’s amendment primarily to win permission to spend up to $50 million
to buy back some of its debt, capitalizing on the fact it’s trading for less than 50 cents on the dollar.
The discount— along with the company’s paltry stock price, just 35 cents a share— are strong
signals of investor unease.

The company doesn’t have a mortgage on its headquarters, though the property is part of the collateral for its bank debt.
The building includes 91,500 square feet of office space, much of it laid out to meet the needs of a broadcaster rather than
a traditional office user.

Despite the layout and the weak real estate market, the location is so outstanding and the interior so aesthetically pleasing
that if Emmis were to sell the building outright to another user, it might be able to fetch as much as $175 a square foot
for the office space, a veteran real estate observer said. That price— an all-time record for this market— would
bring the overall price to more than $16 million.

But Emmis officials don’t sound eager to release the building from their grasp, even though cutbacks
have left it with excess space. The company now has about 240 employees there.

"We think it is a very valuable asset being
right on the Circle in the center of town," Walsh said. "It is important to the radio station
and magazine brands and provides some level of competitive advantage."

Credit rating


If Emmis sold the building but remained the tenant, the company would have trouble
extracting an attractive price unless it gets on stronger financial footing, a real estate observer said.
That’s because the principal consideration of buyers in sale-leaseback transactions is the creditworthiness
of the tenant.

Emmis isn’t
faring well on that score. This month, Standard & Poor’s lowered its rating on the company’s debt another notch,
to CCC+. A company with that rating "is not likely to have the capacity to meet its financial commitment" in the
event of "adverse business, financial or economic conditions."

This month, Emmis hired Blackstone Advisory Services to explore restructuring its lending agreement.
S&P says those discussions have "a degree of urgency," because Emmis might not be able
to comply with more restrictive covenants that kick in May 31.