The Game Has Changed for Madison Square Garden, but Don’t Count It Out Yet

I honestly don’t know if New York City returns to its former glory or not; I’ll leave that to folks like James Altucher and Jerry Seinfeld who had a very public difference of opinion on the matter, as well as Real Money contributor Jim Collins. All of them have lived there, know the issues first hand, and are better equipped to opine than I am.

What I do believe, however, is that New York City real estate has lost its luster, at least into the foreseeable future. I’ve always been enamored with real estate owned by publicly traded companies, and have owned names over the years, such as Saks and the former Madison Square Garden company (now Madison Square Garden Sports (MSGS) , which spun off Madison Square Garden Entertainment Corp (MSGE) this past April) due in part to their New York real estate holdings.

But the game has changed as folks flee the city due to a combination of factors such as crime, high taxes, the pandemic and uncertainty. You’ve also got to wonder whether commercial real estate will recover, now that many have learned that they can indeed do their jobs from home. The companies realize that too, and what a way to cut overhead for businesses that lend themselves to work from home.

Despite my growing skepticism over certain areas of real estate, I was still somewhat surprised to see Madison Square Garden Entertainment Corp pop up in my screen for triple-nets, or companies trading at between 2x and 3x net current asset value or NCAV. I actually did not believe my own eyes, and realized that it may have been a data lag (current market cap coupled with older fundamental data). Sure enough, the company’s 10K just came out, data that was indeed not reflected. However, I crunched the numbers anyway, and as of Tuesday, MSGE does indeed trade at about 3.13x NCAV, very close to triple-net territory. That is quite shocking.

Not surprisingly, the company is not currently profitable due to pandemic-related shutdown of venues, the crown jewel of which is the Madison Square Garden complex. Fourth-quarter revenue and full-year revenue were down 96% and 27%, respectively, and the company lost $4.74 per share for its latest quarter. Yet, the stock price has held up fairly well since the spinoff, closing at $88.51 on its first day of trading (it opened at $100) on April 9, and closing at $77.64 on Tuesday.

It’s the current strength of the balance sheet and potential value of the underlying assets that is supporting the share price. The company ended its fiscal year with $1.244 billion, or nearly $52 a share in cash and short-term investments, and $34 million in debt (there’s also $228 million in operating lease liabilities). MSGE currently trades at just 0.64x book value.

The current fiscal year does not look good for the company, with consensus estimates calling for a loss of $13.15 a share, followed by a loss of $3.35 next year. The company should have a decent runway, however, given its liquidity.

I don’t know if or when New York recovers, but I’ve got MSGE on the radar.

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