By Michael Vodicka
Real estate is one of the hottest investment stories on the Street. That's because for the first time in six years, home prices logged an annual gain in 2012. That momentum has carried into 2013, with the S&P/Case Shiller house price index showing prices on the upswing.
But while there is consensus that real estate is rebounding, how to profit is a different story.
Private-equity firms such as the Blackstone Group
) are popular destinations because the group has been making huge investments in commercial and residential real estate. Homebuilders have also been popular, with industry leaders such as Lennar
) and Toll Brothers
) each up more than 50% in the past six months.
Although these are great ways to cash in on the real-estate rebound, I have discovered an opportunity that exposes investors to one of the most exclusive real-estate investments in the world.
The Madison Square Garden Co.
) is an integrated sports media and entertainment company that provides investors with exposure to a one-of-a-kind real-estate asset: New York City's Madison Square Garden.
The company has three segments. Its media division operates the MSG and MSG+ regional sports networks. Its entertainment segment is powered by the Fuse Music Network, which produces concerts and shows. Its sports division owns the New York Knicks (NBA), New York Rangers (NHL) and New York Liberty (WNBA).
Madison Square Garden has seen big gains in the past year, but there are a number of reasons why the company is in position to build on that trend.
The company offers a unique mix of assets operates in the largest media market in the country. Its ownership of athletic franchises is a virtual monopoly because the creation of new franchises is tightly controlled by the leagues and almost exclusively limited to one team per city. This creates high barriers to entrance for any upstart franchise.
The same can be said for the company's other two divisions, media and entertainment. Madison Square Garden maintains exclusive broadcast rights for all of its athletic events, while its entertainment division offers an unparalleled concert experience in one of the highest-income ZIP codes in the country.
But Madison Square Garden isn't content with its basket of highly exclusive assets. The company is maximizing value and expanding margins with a $1 billion renovation project wrapping up this fall that will enhance fans and performers' experiences. That includes upgraded seating, more bathrooms, retail space and a wider selection of food. The facility will also receive upgraded lighting, sound and video systems.
Madison Square Garden is also pursuing higher-end corporate clients, with 58 lower-level suites that will be 40% larger and half the viewing distance to games and shows. The New York Post projects costs up to $600,000 per suite, 50% higher than some estimates of $400,000 per suite.
Based on recent broadcast deals in the industry, Madison Square Garden looks undervalued. In 2011, Time Warner Cable
) paid $3 billion for a 20-year TV license for the Los Angeles Lakers and $7 billion for a 25-year deal with the LA Dodgers. With the New York franchises considered more valuable than their LA counterparts, Madison Square Garden's enterprise value of $4.7 billion is only half of these recent broadcast deals. That implies huge upside potential for the company's value.
The company's underlevered financial profile will help it pursue additional growth and unlock value, with cash and equivalents of $233 million and no long-term debt on the balance sheet.
Risks to consider: Madison Square Garden's ticket and concert sales can be sensitive to fluctuations in the economic cycle and consumer spending.
Action to take: The Madison Square Garden Co. owns an incredibly unique and diverse basket of assets and operates in industries with high barriers to entrance. That will help insulate the company from new competition while it works to unlock more value with a $1 billion renovation project scheduled for completion this fall. But despite the good news, Madison Square Garden looks undervalued compared with recent broadcast deals in the industry.
Michael Vodicka does not personally hold positions in any securities mentioned in this article.
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