What would you pay?
A thought exercise: what’s the most you would pay for an asset with the following unique characteristics?
- A commercial building with 3 tenants
- The 3 tenants don’t pay fixed rent, but rather a share of their top-line revenue, with no floor
- One of the tenants represents 67% of total rental income in recent years
- In 2018, rental income generated was $1M but declined to $700K in 2019 (down 30% YoY)
- In the last quarter of 2019, rental income generated was just $60K ($240K annualized or down ~75% YoY). No explanation is available for the decline
- The tenants are extremely well-funded and are unlikely to go out of business completely. However, they contractually cannot be kicked out for the life of the building even if sales drop further
We posed this question, separately, to two experienced investors operating outside of the media industry — one in real estate private equity and another in public equities special situations.
The response was near consensus: barring additional information illuminating the decline trend, the real estate professional was willing to pay $700K (1x LTM income) while the public market investor reluctantly “stretched” to $840K (1.2x LTM income).
As some readers may have guessed, the asset in question is a music royalty catalog that was recently sold. Three single song copyrights with significantly declining income and high concentration changed hands in an auction process with ~40 participants.
The final price? The equivalent of $8M in our simulated example (11.5x LTM & 33x last quarter annualized).
It would be foolish to definitively conclude that either our investor friends or the ultimate buyers are wrong in their assessment: time will tell. Yet this anecdotal datapoint undoubtedly highlights the increasing risk tolerance in the traditional music royalty market. We firmly believe this will present opportunities for patient investors when sentiment inevitably reverts to the mean.
For the time being, it’s a great time to own your rights!
