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Concinnus Financial Research Report: Do Stadium Naming Rights Align With Shareholder Best Interests?

Study thesis: Stadium naming rights do not align with best interests of shareholders. A company that purchases stadium naming rights may lack prudence and care in allocating capital, which negatively affects shareholder returns over the long-term.

Study background

Thus far in 2016, several high-profile bankruptcies have been witnessed, especially in the retail and energy industries. The financial health and long-term viability of many other businesses have been called into question.

This has especially been the case in retail, where internet sales growth compounded in the double digits for a decade now, has put pressure on many traditional retailers. In the oil and gas industry, the steep fall of energy prices that began in 2014 has whittled away at the strength of the world’s largest producers and hastened the decline of smaller ones, especially those producers in shale in the United States.

The observation was made that several public companies that have gone bankrupt this year or that have been under increased scrutiny are or were spending millions of dollars a year on the stadiums for professional athletic events. Two such companies were Sports Authority, which had purchased the naming rights for the stadium of the Denver Broncos in the NFL; and Chesapeake Energy, owner of the Oklahoma City Thunder of the NBA stadium name.

Sports Authority declared bankruptcy in March of 2016 and will completely cease to exist by the end of the year, leading to near-total loss for investors. Chesapeake Energy is still a viable business, but laden with debt, dealing with cash flow shortfalls going on two years, and a business model that does not rely on end consumer awareness, the wisdom of holding naming rights seems dubious at best.

Due to these observations, the thesis was formed that stadium naming rights generally do not align with investor best interests. The practice may also be indicative of a lack of prudence and care on the part of management in allocating capital and making the best use of business cash flows.

Research description

The sales of stadium naming rights gained popularity in the early 1990’s as a way for stadium owners to raise funds needed for construction and to increase event revenue. Large corporations started to see the large venues as an effective way to mass-market and raise awareness of the business.

Our observations were limited to the four most popular professional athletics leagues in the United States and Canada: the National Football League (NFL), Major League Baseball (MLB), the National Basketball Association (NBA), and the National Hockey League (NHL).

The study spanned the history of the sale of naming rights in these leagues, the first of record being in 1973 between the Buffalo Bills of the NFL and private food company Rich Products.

The primary study was to first compile a historical list of all company purchasers of stadium naming rights, both private and public, and identify the duration of the right, and whether a bankruptcy occurred during or shortly after termination of the naming rights contract.

The secondary study was to compare publicly traded companies stock performance during the duration of the naming rights contract against an index, either an industry specific index or a broad stock market index like the S&P 500.

Summary of observations

There were an observed 134 companies that purchased naming rights for professional sports teams since 1973. Of those, 25 were privately held and another 11 were acquired by another company during their sponsorship. Of the remaining 98 publicly traded companies, nine of them declared bankruptcy during or shortly after their naming rights contract with the respective stadium.

This left 87 companies with publicly traded stock that we could compare against an index. The average total return across the 87 companies was 150%, and total return outperformance against respective indexes of 71%.

However, there were 56 companies that underperformed their index during their ownership of stadium naming rights, and only 31 that outperformed. We found a handful of outliers that outperformed their index skewed results. Those outliers were Qualcomm (own the rights for the San Diego Chargers stadium from 1997 – present with stock performance of 3,100%), Target (own the rights for the Minnesota Timberwolves arena from 1990 – present with stock performance of 1,860%), and Molson Coors Brewing (own the rights for the Colorado Rockies field from 1995 – present with stock performance of 1,880%).

When removing those outliers, total return of the remaining 84 companies dropped to 74%, and the average company underperformed its index by 8%.

We found that companies that have owned naming rights for longer periods of time (10 years or more) performed much better and rarely underperformed their stock index. Short-term deals, of which the majority of naming rights deals were, usually underperformed their stock index or ended when the company declared bankruptcy.

Of note was company performance by industry. Most companies observed operated in the banking, oil and energy, technology, or consumer discretionary industries. Companies operating in the consumer discretionary spending industry (retail, food and beverage, and consumer-slanted technology) usually outperformed their index during their naming rights deal. Companies operating in banking, oil and energy, and technology (enterprise or business-to-business slanted technology) usually underperformed their index.

It was observed that bankruptcies occurred during bubbles or periods of rapid change. Most bankruptcies occurred during or around the technology bubble of the late 1990’s or the financial crisis of 2008.

Conclusions

We conclude that the purchase of stadium naming rights by publicly traded companies generally does not align with the best interest of shareholders. An overwhelming number of companies stocks underperform broad-based stock indexes during the deals, and a high percentage declare bankruptcy during periods of severe or prolonged economic downturn. This would indicate that many of these companies are not exercising prudence and care when allocating capital and making the best use of business cash flows. Many companies that were observed, especially those that declared bankruptcy or held the naming rights for a short period of time, displayed a lack of diligence in controlling business expenses and overhead costs.

However, it could be argued that a few select companies seemed to benefit from the deals. Those operating in industries where consumer awareness and advertising benefits business and influences consumer choice (like food, beverage, and consumer-slanted technology) outperformed while sponsoring a stadium. Other companies have a vested interest in the stadium or team itself, like Rogers Communications with its ownership interest in several professional sports teams. Factors such as this also must be considered before taking a critical look at naming rights.

Excluding a few exceptions, though, it can be concluded that shareholders who own stock of a company that purchases naming rights to a venue should weigh the cost of the deal against benefits expected to be received. It is also important to consider the company’s management team, how they manage overall business operations, and their stewardship on company funds and assets.

Finance Shminance: Stadium Naming Rights

In this episode of Finance Shminance, Adam Austin and Nick Rossolillo talk about the research report from Concinnus Financial about stadium naming rights, the companies that purchase them, and lessons for investors.

Finance Shminance: the Internet of Things

Host Adam Austin and portfolio manager Nick Rossolillo discuss the “Internet of Things.” You’ll learn what it is, how it will shape our world, and how you can start to think about the movement from an investors point of view.

Finance Shminance August 10, 2016 – Economic Indicators

Host Adam Austin and Concinnus Financial lead portfolio manager Nick Rossolillo discuss economic indicators and there use to individual investors.

The Invention of (and Fallout From) the 30-Year Mortgage

“Some debts are fun when you are acquiring them, but none are fun when you set about retiring them.” – Ogden Nash

The year was 1934. The United States was wallowing through the Great Depression. Unemployment was well into the double digits, nearly one in ten homes were in foreclosure, and the average property had lost about half its value from peaks seen in the 1920’s. That year would see the launch of the Federal Housing Administration, or FHA, one of many measures to help pull the country out of its deep rut.

The economic crisis of the 1930’s would end up being a grand experiment in government intervention, and would give birth to the modern home loan that we are familiar with today. Yet the onset of these financial instruments have had far-reaching consequences, both intended and unintended, and is worth mulling over. What can we learn from history, and how do we put that knowledge to work for our personal financial situations?

The Invention of the 30 Year Mortgage

The FHA was created to help Americans get back into or keep their home, as well as stimulate construction. Many home owners were unable to negotiate terms with lenders during the depression, in part because of widespread unemployment and a lack of liquidity for banks. New standards of lending were needed to get things moving again.

Prior to the onset of the Great Depression in 1929, home mortgages were very different from what they are now. A typical mortgage had an average six-year term, had a variable rate that was typically re-negotiated every year, and the loan was usually limited to a maximum of 50% of the property value. As a result, more than half of Americans rented in the pre-WWII era. Home ownership was the exception, not the rule.

When the FHA program got under way, mortgage terms and conditions were drastically altered. Duration of the loan was extended to the now familiar and commonplace 30-year term, rates were offered at fixed interest rather than variable, and the loan amount was increased to well over 50% of the property value. The government-backed program met with great success, and was expanded post WWII when war veteran’s compensation packages started to include the new home loan terms.

These new long-dated, fixed rate, high loan-to-value mortgages successfully stabilized the housing market and helped many Americans fulfill their dream of home ownership (by the 2000’s, homeownership had grown from less than 40% of households owning their own home prior to the Great Depression to well over 60% of all households owning their own home).

Despite those successes, there have been both financial and psychological repercussions from the loose lending practices launched over 70 years ago. What have those repercussions been?

A History of US Real Estate Since the 1930’s

Let’s take a look at a few charts illustrating how real estate has reacted since the implementation of FHA standards.

Home Prie Index

Home Value to Income

Home Price Inflation Population

Data courtesy of Robert Shiller, Standard and Poor’s, and the US Census Bureau. Charts created by Nicholas Rossolillo.

Let’s start with the first chart, the Case-Shiller home price index. Home values are indexed to 1890 property sales prices, and account for inflation rates (basically meaning that inflation is subtracted out, and we are left with property values in today’s dollar figures). Chart number two illustrates the ratio between home values and total household income. The historical average has been roughly 2.2 (stated another way, a home value is 2.2 times your annual pay), but that ratio starts to rise rapidly starting in the late 1980’s and now hovers around 3.5. Chart three compares the Case-Shiller index from chart one with inflation and population growth (notice the uncorrelated price of real estate compared with steady population growth, but the inverse relationship property has with inflation and interest rates).

What do we learn? You can see in the charts the depressed values of real estate through the 1930’s. As new lending standards got under way in the late 30’s and through World War II, real estate makes a sudden and dramatic jump up. As that period gives way to rising interest rates and eventually high inflation, real estate stagnates for a roughly 30 year period. Inflation and interest rates started a steady downtrend in the 80’s, and combined with another round of slow easing of lending practices, we see property values run up again very quickly through 2006. As seen in chart two, the spike in property value as a ratio to income is also concerning, as that ratio remains well above the historical average even post-2008 financial crisis.

Chart three shows that, despite what many people believe, real estate is uncorrelated with population growth (more people does not always translate into an increase in demand, which in turn does not always lead to an increase in price). Instead, inflation and interest rates paired with current lending practices are a much more useful proxy for home values. It is also concerning that current home values remain at historic highs when factoring in inflation and the average family pay check.

Real Estate and Your Financial Plan

For anyone looking to purchase a home, remaining cautious would be the course of wisdom. Buying a home is big decision. For most Americans, a home purchase likely means a purchase of their largest asset. That asset purchase can have far-reaching and long-lasting consequences. Keep in mind that, despite what many claim, real estate values do not ALWAYS go up. Sometimes the stay flat. Sometime they go down. Sometimes they go down and stay down for a very long time. The above charts demonstrate this fact.

Here are a few tips for home buyers:

  1. Purchasing a home is not an investment, it is the purchase of a commodity (a roof over your head). What is your long-term plan? Is this home an acceptable place to put down roots? What is the plan if you do have to move and you are not able to sell (the assumption that property values will be higher someday is not good enough)?
  2. What are your financial priorities, and what do you prefer to spend money on? Is it your place of residence, your car, travel, shopping, starting a family, etc.? For most of us, money is a limited resource. We cannot have it all, and therefore money should be prioritized and allocated according to what we deem most important in life. Are you spending your money on things that are truly important to you? In other words, do you have a budget?
  3. Beware of taking on too much house. Just because a lender (be it through a government subsidized program or otherwise) may be willing to lend you as much as 40-50% monthly debt payment to your gross monthly income does not mean you should take on that much of a payment. Living well within your means, if possible, is always the best course of action. If you decide to buy, how low can you realistically get your mortgage payment as a percentage of your income? I typically recommend that your mortgage payment for your primary residence be no more than 25% of monthly income.

Mortgage lending has undergone massive change in the US in the last 70 years, and that change has drastically altered the outlook many have on real estate and housing. A little historical and mathematical perspective can go a long way and can help us avoid the irrational decision making when it comes to home ownership that has ruined so many over the last decade.