I like Dan Ferris — not personally, I don’t know him personally, but I like his thought process, and have liked some of the ideas he has presented at conferences I’ve attended or that I’ve sniffed out from his teaser ads for the Extreme Value newsletter at Stansberry… he’s generally had a level focus on buying both “world dominator” companies at good prices and looking for more “deep value” stocks with underappreciated assets.
And, frankly, it’s been a while since we’ve had an interesting Ferris ad — perhaps because value investing ideas have been a bit thin on the ground over the last year or two, particularly for folks who don’t want to speculate on bigger picture things like a cyclical turn in the economy or a “bottoming” in prices of some commodity or another. So it caught my eye when folks started asking about a new ad from Ferris last night, and I thought we’d dig into it a little bit. It’s not a deeply mysterious idea, and it’s one that has circulated in value investing circles for several years… but I’ve never really looked at it, so we’ll remove the mystery, take a look, and give you some space to think for yourself about this latest idea. Ready?
The ad starts out with references to Ferris’ past big wins in real estate over the past 15 years or so, which seem to be references to past suggestions of his like Alexander & Baldwin or St. Joe, two of the “unlocking real estate value” ideas that were popular and profitable before the real estate crash, as more investors were beginning to look for those kinds of “hidden” or undervalued real estate assets owned by publicly traded companies. Here’s a little snippet that I think gets at Ferris’s point pretty well:
“… buying real estate in the stock market also allows you to get in and out of opportunities very quickly… and helps you avoid all of the hassles that typically come from actual real estate investments.
“Let the company worry about zoning permits, tenants, taxes and all the rest of the day-to-day work of being a landowner… while you enjoy the hassle-free life of a stock owner.
“Since these stocks are backed by the ultimate margin of safety (dirt cheap land), you can buy them and forget about them.
“That’s exactly why I call this ‘the perfect investment.’
“Like many unusual ideas like this one, however, they have their time… then the opportunity is gone.
“Since I first discovered my first “undervalued land” opportunity, the housing market soared… then crashed… and today, is slowly recovering…
“And for over a decade, I didn’t think I would ever find another opportunity like that again.Are you getting our free Daily Update
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“But that all changed in April of this year… when I came across one of the most promising real estate opportunities in the stock market I’ve ever found.”
Ferris hasn’t been ignoring land entirely since the crash, at least not in the stocks he teases — he pitched one almost two years ago that was perhaps a bit emblematic of the challenge we face in locating “hidden value” real estate stocks these days, when so much less is really hidden: that was what is now Nam Tai Property (NTP), so he had to go with a Chinese manufacturer and bet on its ability to repurpose themselves into a real estate developer as their core business was dying down. That hasn’t gone anywhere just yet, though I haven’t been following the story recently and don’t know if Ferris still likes it.
So what is it this time around? Here are some clues for you:
“I just released the details on a way you can own some of the most valuable real estate in the world today…
“Prime investments in one of the most exclusive areas of one of the wealthiest cities in the world — Manhattan — at a 44% discount based on the value of its biggest four assets… which, by my conservative calculations, are worth more than twice its stock market value…
“Founded in 1879, this is a way you can own a share of a truly one-of-a-kind, unique asset usually only available to billionaires…
“And an empire that spans from coast to coast, including some of the most iconic theaters and venues in America.”
That’s enough to identify the stock, though it’s not necessarily one that a lot of people outside of New York City have much familiarity with — there are very few professional sports franchises or even sports facilities owned by publicly traded companies, and this is the only one I’m aware of: Madison Square Garden (MSG), which owns that iconic arena in Manhattan as well as the two professional teams who play there (the NBA’s New York Knicks and the NHL’s New York Rangers). They also own a few other high profile facilities, notably the Chicago Theater in (you guessed it!) Chicago and the Radio City Music Hall in NY, and the Fabulous Forum in Inglewood (former home of the Lakers and Kings, now an entertainment arena mostly used for concerts). They have a few other smaller assets as well, but those are the biggies.
And Madison Square Garden’s stock has been mixed up quite a bit over the years — the Dolan family, which controls MSG as well as Cablevision (the regional cable company in the NYC area) and AMC Networks, and those assets have been split up and spun off over the years, culminating in this most recent split of MSG and MSG Networks. MSG Networks (now at MSGN) is the more stable of the two when it comes to quarterly revenue and predictability — that’s primarily the regional sports networks who broadcast all the games of the Knicks and Rangers (and of a dozen other major teams, both college and pro, that MSG does not own). MSG, the company being hinted at here, is the one that owns or leases the venues and owns Knicks, Rangers and some lower-tier teams (including the NY Liberty in the WNBA, as well as minor league teams — the AHL’s Hartford Wolfback and the NBDL’s Westchester Knicks).
MSG, or as it’s now called The Madison Square Garden Company, has been talked up as a value investment many times over the past several years — partly because the few real cornerstone assets are probably worth more than their carrying value on the books. The Knicks, for example, would probably sell for at least $2 billion if they were put up for sale, and the Rangers could possibly get half of that — so with a market cap of $4 billion for the whole company, you can see that those values are probably a bit understated on the books.
Certainly the value of the assets should be understated by a little bit — we should put some kind of discount on the assets of MSG, because the Dolan family continues to control the company and they’re not likely to sell off the assets and send you the cash. And in the meantime, of course, it’s always possible that the Knicks or the Rangers will drop considerably in popularity, and that would hurt their value (and the revenue of MSG, if they stop selling out games or get worse TV contracts from MSGN in future renewals, among other things). Much of the value of the assets at MSG, like the sports teams, the Rockettes, Radio City and the MSG Arena, is predicated on the continued high demand and popularity of those entertainment assets… if the Knicks or Rangers lose their fan base, or the Radio City Christmas Spectacular stops selling out, all the ancillary businesses that flow from that popularity and those full houses in the theaters and arenas also fall in value.
So those are the two biggest risks I see with MSG: You’re stuck with the Dolan family, which can do almost anything it likes as a control investor; and you’re relying on the continuing popularity of a few major tentpole assets in the Knicks, Rangers, and Radio City shows. Given that those major assets have been incredibly popular on a pretty consistent basis for 75 years, that may be a safe bet… but you can never be entirely sure, and even New York sports fans might give up eventually. Lots of other trends are tied up in that — for example, lots of folks are worried about the health of Disney’s (DIS) ESPN franchise, because the worry is that the competitive rise of other sports networks has helped to make the broadcast rights fees too high for profitability if we’re really entering a declining market for “bundled” cable TV… and if the rights fees for sports go down at some point (they essentially never have, each contract continues to blow away previous ones… so this is speculative), then the sports teams themselves might be worth less money (and would certainly have less revenue coming in).
And, of course, the Knicks are expensive to run — their player payroll is actually pretty low compared to other NBA teams this year, at a bit less than $60 million, but that’s still a meaningful amount of money (the biggest NBA payrolls are in the $90 million neighborhood, and the Knicks will likely work their way back up to that point — still pretty small compared to the $150-200 million that the highest profile soccer and baseball teams pay to their players, but a basketball team only has a dozen players).
And with all that, MSG is not currently profitable, despite having (by far) the highest ticket prices in the league (the average Knicks ticket is about $130, more than twice the NBA average of about $50… and it’s not even close, the Lakers at $102 are the only other team to get over $100 a seat). That might change — if all else stays equal, the massive new TV deal that the NBA signed a couple of years ago will go into effect next season and net the Knicks probably an average of close to $30 million more per year over the life of the deal (through 2025), and that would be enough to erase the current deficit and make MSG profitable. If they could somehow manage to get both the Knicks and the Rangers to have deep playoff runs at some point in the near future, that would really help to balloon revenue (mostly because that could bring a dozen or more home playoff games).
So they’re fairly close to being profitable on the income statement, though it will ride up or down somewhat based on the success of the teams and of new entertainment initiatives (including the new Rockettes show that debuted last year, the New York Spectacular), but this is, really, an investment story about undervalued assets — so is there some way to extract the value from those assets?
The biggest potential there, if we assume that they’re not going to try to sell the Knicks for a few billion dollars, is in Madison Square Garden itself. That’s also a substantial area of risk — the special permit to continue operating Madison Square Garden in its current location, above Penn Station, expires in seven years… with that deadline originally concocted as a way to pressure everyone to come up with a reasonable plan for building a new and acceptable Penn Station (if you haven’t been there, it’s horrible and crowded, and it hosts much of Manhattan’s commuter rail traffic as well as Amtrak — making it the busiest train station in the US). You can’t easily build a new Penn Station without doing something dramatic with the Garden, since it sits right on top (they’re at least likely to get rid of the theater that sits underneath that Garden, which itself runs big shows and seats more than 5,000).
The governor is pushing for a solution, and MSG is amenable to doing something, but there’s certainly some risk in that we have no real way of knowing how it will work out — or whether MSG will effectively end up “trading” their rights at the current location for a new Madison Square Garden elsewhere in Manhattan, at uncertain cost. MSG was just renovated over the past couple years, which has helped to increase the cash generation potential (adding luxury suites and more revenue-generating amenities), so things are going pretty well right now, and MSG’s assets at the current Garden site should be valuable enough to make them come out of a Penn Station renovation just fine — but they don’t own Penn Station or the ground beneath the Garden, and how things will look in 5-10 years is highly uncertain. There’s no guarantee that they’ll get a big billion-dollar windfall just because they own some “air rights” above the current Garden that could potentially be developed, but you can also be pretty sure that no NY politician will want to scare the Knicks or Rangers fans too much.
So while it’s pretty easy to conclude, and probably accurately so, that the assets MSG owns are far more valuable than the company’s market cap would indicate — we can’t easily compare the Knicks or Rangers to other teams, since there aren’t publicly traded competitors, but if we assume the Forbes values are in some way accurate the Knicks are worth $3 billion, the Rangers $1.2 billion, and the WNBA and minor league teams are worthless, that’s the market cap for the company right there. I think it’s safer to assume some discount, given the lack of publicly traded sports teams, but if we assume that we should discount them by 25% then those two iconic sports teams together are worth $3.15 billion.
They don’t seem to have any long-term debt, and the value of the MSG Arena (they own the structure and the air rights, not the land) has been estimated as being in the neighborhood of $1-1.5 billion and is definitely not fully reflected on the balance sheet, so those two teams and the arena are very likely worth more than the $4 billion it would take to buy the company at today’s price. Right now they have well over $1 billion in cash on the books as well, so I’d agree that it’s still trading at a discount… I just don’t know for sure that the discount will change over the coming few years, or how the Garden/Penn Station development/renovation deal will end up shaking out (they can’t just sell the property and reap the cash, of course, because they still need a place for their two most valuable assets to play so they can continue to entertain the titans of Wall Street and pour $20 Miller Lites down their throats).
I don’t know the ins and outs of their financials, but after skimming through I’d be inclined to put my first back-of-the-envelope calculation of the company’s pretty conservative value at about $5.5 billion — that’s $1.5 billion in cash, $3 billion for the Knicks and Rangers, and $1 billion for their actual real estate, including the Garden’ air rights. That leaves room for about 30% upside in the share price from here (the market cap is $3.9 billion today)… and it’s hard for me to seriously forecast a scenario where the value drops meaningfully below $3 billion, which would be roughly 30% below today’s price. I think being above $5.5 billion is far more likely than being below $3 billion five years from now, though there are several major moving parts, including the possible move of the Garden, that could change that even if they don’t buy or sell any major assets. There are no other big “resets” I’m aware of, since the new NBA TV deal is already well known by investors, and MSG got a new MSGN long-term TV deal for the regional networks recently as well.
That’s where I leave you, friends, and you can do the rest of your research make a call on your own — Dan Ferris is almost certainly recommending shares of MSG, and The Madison Square Garden Company does own assets that should be in, in almost any reasonable scenario, worth more than the $4 billion market cap of the company. That doesn’t mean you’ll get rich in a hurry from owning these shares, particularly if the Knicks are rebuilding and not making the playoffs and Penn Station is not renovated in the next 5-10 years to help “unlock” the air rights value over the Garden, but there’s some safety in knowing that the stock should always have some intrinsic value in owning two of the most popular sports teams in the country and some iconic venues. The Dolan family’s controlling stake means that an activist investor won’t be able to get involved and push them to sell the Knicks to Michael Bloomberg or another New York gazillionaire for $5 billion or something outlandish like that, so the biggest “locked” values in the Knicks and Rangers are unlikely to be realized directly, but there is substantial value in those sports franchises and the increasing cash flow they generate, and in the potential Manhattan real estate they control… and you can consider the other theaters and the Forum to be good, unique (as in hard to replace) cash-flowing assets that should be able to consistently generate profits from the theatrical and musical performances they host.
So what do you think? Interested in the lumpy revenues and probably undervalued assets of The Madison Square Garden Company, even if they no longer enjoy the easy and steady revenue of their sports networks following last Fall’s spinoff? Are you a frustrated Knicks fan who just wants to own a share of MSG so you can take your stock certificate out and stomp on it when they miss the playoffs? Let us know with a comment below.
Disclosure: I mentioned Disney (DIS) above, and I own shares of that stock. I don’t own any other stock mentioned above, and will not trade any covered stock for at least three days after publication per Stock Gumshoe’s trading rules.