The Two-Year-Old Money Pit

Steve Zorn

“Expensive horses don’t always run well. It’s a risk [buyers] are willing to take. They have plenty of money. What they don’t have is a good horse.”

                           ---Francis Vanlangendonck, Summerfield Sales.

         Back in the spring of 2005, two bidders with plenty of money – Demi O’Byrne for the Irish colossus Coolmore and John Ferguson for Sheikh Mohammed of Dubai – hooked up at the Fasig-Tipton two-year-old sale at Calder and pushed the price of a Forestry colt, who’d breezed an eighth of a mile in a then-unimaginable 9 4/5 seconds, to the absurd level of $16 million. Coolmore’s was the winning bid for a colt they named The Green Monkey, after a golf course in Barbados that some of the Coolmore principals frequented. It was then, and still remains, the highest price ever paid for a two-year-old thoroughbred.

         As things turned out, The Green Monkey wasn’t much of a racehorse. The best he could do was one third-place finish in just three lifetime starts, earning a total of $10,440. He was then retired to an equally ignominious stud career in Florida, which was cut short by health problems. He did, it is true, sire the winner of the Panamanian filly triple crown, as well as two US black-type winners, but that must have been a bit less than his buyers expected back in 2005. He was euthanized in 2017.

         The Green Monkey is just the most egregious example of how an expensive two-year-old may not always run well. But he’s far from the only one. My friends at Two-Year-Old Sales Preview Watch have been parsing the data on these sales and have produced a number of very interesting lists of the success, or lack of it, that various buyers have had with juvenile auction purposes. (You can reach them on their Facebook page or directly at previewatch@yahoo.com if you’re so inclined.) [Steve – shouldn’t there be 2 w’s in preview watch?] I’ve updated their list to be sure I’ve included the very latest earnings for all the horses, and I’ve added in the revenue when horses were sold as broodmare or stallion prospects, but even so, the figures strongly suggest that buying a two-year-old for a lot of money is a very good strategy for losing a lot of money.

         Let’s consider the results for juveniles purchased for six- and seven-figures in the past decade from a number of vantage points; we’ll look at the results that a couple of major buyers have had, then at the results for two-year-olds that were so impressive at the sales that they rated a story in the BloodHorse. Whichever way you break down the statistics, it isn’t pretty.

         Let’s start with the buyers. Perhaps the biggest purchaser of expensive two-year-olds over the past decade has been Terry Finley’s West Point Thoroughbreds partnerships, either alone or in partnership with other owners. From 2014 through 2019, West Point bought 48 six-figure juveniles and one – this year’s three-year-old Chestertown – for seven figures. More than a third of these horses are still in training, including the aforementioned Chestertown, who most recently finished sixth, beaten 15 lengths, in the Peter Pan Stakes at Saratoga. So, there’s still lots of room for the group as a whole to increase its earnings. But the aggregate picture is not positive: over those six years, West Point and its partners paid $16,758,000 for the 49 auction purchases, an average of $342,000. Those same horses have, thus far, earned $4,962,848 on the race track, an average of $101,282. That might be a respectable number for a horse one bought for, say, $25,000, but it’s not great for a horse that cost well over $300,000. Those 49 horses have so far won a total of 87 races, about 1.8 per horse, and have made a total of 487 starts, well below the national average. Those statistics of wins and starts per horse look even worse if one subtracts out the numbers for those horses that were claimed away from West Point and that have recorded many more starts and wins, albeit at lower levels, for their subsequent owners.

         West Point, to be sure, has some success stories. Their current four-year-old Galilean, a $650,000 purchase two years ago, just won another stakes on the West Coast and has already earned over half a million dollars. West Point bought the now five-year-old Seven Trumpets, a stakes winner and Grade One-placed son of Tiznow’s son Morning Line, for $205,000 in 2017, and so far, the horse has earned $516,684 and perhaps has some residual value as a stallion prospect. And the recently retired Gunmetal Gray, who more than covered his $225,000 purchase price with earnings of $284,700 (not taking into account training costs) was also, at last report, being evaluated as a potential stallion. The Grade One-placed mare Best Performance was sold as a broodmare prospect for $560,000, after earning $398,448 on the track, more than covering her $350,000 purchase price. But overall, only six of those 49 expensive two-year-old even earned enough on the race track to match what West Point paid for them, and in two of those cases, the lifetime earnings include purses earned after the horses were claimed away from West Point.

         Now let’s take a look at another kind of buyer, the wealthy entrepreneur. Robert and Lawana Low got their money from Low’s Prime, Inc., a highly successful trucking company. Over the years they’ve spent a lot of that income on thoroughbreds, the best known of which may be the ill-starred Magnum Moon, who won the Rebel Stakes and the Arkansas Derby before finishing 19^th in the 2018 Kentucky Derby and never racing again. Magnum Moon contracted laminitis and was euthanized in 2019.

         The Lows buy many of their horses as yearlings, but over the past two decades, they’ve purchased 21 juveniles at auction, most recently paying $1,200,000 last year for the Liam’s Map colt Colonel Liam, who won a first-level allowance at Saratoga just last week. Aside from Colonel Liam, only one other of those 21 juvenile purchases – the Grade 3-placed Intrepid Heart - is still running in their name, so it’s pretty safe to make a judgment on how they’ve done.

         All told, the Lows paid $7,962,000 for those 21 horses, an average of just under $380,000 per horse. And, over their careers, the horses earned $3,173,979, or just under 40% of their purchase prices, without adjusting for the likely expensive training bills for 21 horses. Another caveat, a substantial share of those earnings came after the Lows lost the horses to claims or sold them privately; nine of the 21 juvenile purchases are currently racing or ended their careers in some other owner’s silks.

         Still, the money they spent did get them some good horses. In addition to the three-year-old Colonel Liam, who could still, in racetrack parlance, be “any kind,” Steppenwolfer was third in the 2006 Kentucky Derby, Intrepid Heart and Federal Case were graded-stakes placed, and Agent Di Nozzo was a stakes winner before sliding down the claiming ladder. So, the Lows may well have gotten enough good horses to be satisfied with their monetary losses.

         Here’s another way of looking at the data: what two-year-olds generated enough buzz, whether by way of fast breezes or high auction prices, to get written up in the BloodHorse? From 2008 through 2019, there were just 20 juveniles sold at auction who got that treatment. They ranged in sale price from the $2 million that West Point Thoroughbreds paid last year for Chestertown down to $250,000 for Angelcents, who was eased in the stretch in her second lifetime start and never raced again.

         In the aggregate, those 20 juveniles cost $19,390,000, an average of just under $1 million each. On the race track, they earned a total of $3,542,409, an average of $177,120. But that average is a bit misleading. Nearly half the total purse earnings, $1.5 million, came from a single horse, Carpe Diem, winner of the Blue Grass and the Tampa Bay Derby, who now stands at Winstar Farm in Kentucky. And even Carpe Diem’s earnings on the track were less than his purchase price of $1,600,000. Backing Carpe Diem’s numbers out, the other 19 horses cost a total of $17,790,000 and earned just $2,022,609 on the track

         One striking statistic from these 20 well-publicized juveniles is how little they actually raced. Three of the 20 never reached the starting gate at all, and the group as a whole averaged less than seven starts per horse. Most of these horses breezed very fast, but very few were at all durable in training. Only three of the 20, in fact, had as many as 12 lifetime starts. Were there some stakes horses in this elite group? Of course; half a dozen stakes winners or stakes-placed. And a couple – the aforementioned Carpe Diem and the broodmare Black Canary, who sold for $675,000 when she was done racing – went on to lucrative careers off the track. But perhaps there’s a better, or at least a cheaper, way to get a good horse?

         So, what’s the takeaway re two-year-old sales? If you have all the money in the world and don’t mind redistributing some of it to breeders, pinhookers and (possibly unscrupulous) bloodstock agents, then by all means go into the market. There are some good horses out there. But there are a lot more horses that you’ll spend six figures on and eventually let go for a $16,000 claim than there are expensive horses who will actually earn back their cost.

         As I’ve shown in previous columns here at pastthewire.com and on my Business of Racing blog, most thoroughbred owners lose money on most of their horses. But if you’re of a mind to lose a lot of money quickly, then buying an expensive two-year-old is a pretty good strategy.

Coronavirus Relief for Gamblers?

Steve Zorn

(Originally published April 18, 2020, at pastthewire.com)

         With many (most?) tracks and virtually all casinos in the US closed because of the COVID-19 pandemic, what’s a degenerate gambler to do? One could – and judging from the comments on Twitter, many do – bet on Will Rogers Downs on the days when Tampa, Gulfstream and Oaklawn are dark. But Tampa is closing this weekend, and Oaklawn will close in early May, with no guarantees as to which, if any, of the major tracks will pick up the slack. Can a racetrack regular survive just watching the television feed of the post drag at Gulfstream?

         Maybe not, but if that racetrack (or race book or poker room) regular can qualify as a professional gambler, then the recently enacted CARES Act for coronavirus relief might actually offer some help. Of course, as you’ve probably heard, the CARES Act relief package for small business has already run out of money, but let’s be optimistic – because if we weren’t we wouldn’t be gambling in the first place, would we? – and assume that Congress will get around to authorizing more money for the program. When that happens, and the loan spigot is turned on again, here’s how a devoted gambler might get some help.

         First, the CARES Act relief applies only to small business, including sole proprietors. So, you have to be in the “trade or business” of gambling. More than 30 years ago, The US Supreme Court, in the Groetzinger case, decided that gambling could indeed be a trade or business, if certain criteria were met. The gambler has to approach betting in a businesslike manner, keep good records, adjust betting methods to reflect changing circumstances, and have a profit objective. That last test – the profit objective – doesn’t have to be realistic, just held in good faith. The courts have even held that a slot machine player, gambling against the house, can be in the trade or business of gambling, as long as she kept good records, changed her playing strategy from time to time, and continued to believe, even in the face of the evidence, that she’d eventually win.

         Second, gambling can’t be just a hobby. A professional gambler, to qualify under the Internal Revenue Code and the CARES Act, needs to show some expertise, operate in a businesslike manner, devote a significant amount of time and effort to the task, and actually rely on gambling, not other income, for at least some portion of living expenses. There’s a built-in presumption that, if you show a profit for at least three of the past five years, whatever you’re doing is more than a hobby.

         So, let’s say one meets all these criteria. You spend eight or more hours a day with TVG on the screen, make your wagers through a high-rebate ADW account and actually, at least some of the time, squeeze out a bit of a profit. When you’re reduced to playing Will Rogers and Gulfstream, it’s as if you were the proprietor of a high-end restaurant and all of a sudden you can only offer half a dozen take-out dishes to be picked up on the sidewalk. In other words, your business opportunities have been drastically limited.

         That’s where the CARES Act could come to the rescue. Under the act, $349 billion was appropriated for small businesses, specifically including independent contractors and sole proprietors. So, the fact that a gambler doesn’t have any employees doesn’t bar assistance. In fact – at least when there’s some more money in the federal pipeline – a gambler deprived of chances to bet by COVID-19 can actually qualify for two different kinds of small-business assistance.

         The most attractive option is the Paycheck Protection Program, a loan that can cover up to 2.5 months’ worth of “payroll,” carries an interest rate of just 1%, and can be entirely forgiven if in fact the money is used for “payroll.”

         But wait, a professional gambler doesn’t have a payroll, just a bankroll. Well, the Small Business Administration regulations say that’s OK, “net earnings from self-employment” count as payroll for this purpose. Just calculate your average win for that 2.5-month period. The only restriction is that it can’t be at an annual rate of more than $100,000. And you have to show some proof, like tax returns or other records, that you were actually making what you’re claiming.

         And our professional gambler can also apply for a $10,000 “Economic Injury Disaster Loan” to cover other costs. That might even buy a few Daily Racing Forms and maybe a Clockers’ Report or two.

         There is one potential hiccup: an old regulation, dating back 25 years, bars SBA loans to businesses that derive more than one-third of their income from gambling. It looks like it was intended to bar SBA loans to small casinos, and maybe to ADW facilities. But the CARES Act is, to say the least, ambiguous about whether all the old SBA restrictions apply to these new loans, and the guidance issued so far is replete with statements that the legislation is intended to expand the pool of eligible borrowers. So find a good lawyer and give it a shot.

         But what about those degenerates still betting Will Rogers Downs? COVID-19 hasn’t totally shut down US racing. Not a problem. The CARES Act merely requires that a borrower certify that the “current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.” Surely someone who normally bets NYRA, Churchill and Santa Anita could make that statement in good faith.

         So, all you full-time horseplayers out there: if you’re feeling limited by the current menu of tracks to bet on, just write your Congress members and get some more money in the Small Business Administration pipeline. It’s a safer bet than the 1 horse in the 6^th at Will Rogers.

Churchill Downs Inc.’s Annual Report:

Can Racetrack Financials Tell Us Anything at All?

Steve Zorn

(Originally published April 30, 2020, at pastthewire.com)

         A decade ago, the three largest US racetrack companies – Churchill Downs, Inc., the New York Racing Association and Frank Stronach’s Magna Entertainment – all issued financial reports that made at least some of their operations transparent. Then, in 2011, Stronach took his racetrack business private, which meant that it no longer released public financial reports. And in 2016, NYRA, which had been operating as a quasi-governmental limited-profit entity, decided it was no longer subject to New York State’s Freedom of Information Law and stopped making its financials public. And now, with its 2019 annual financial report and first-quarter 2020 results, just released this week, Churchill has so thoroughly muddied its presentation of data that you can no longer make any meaningful statements about how its individual racetracks are doing.

         There are probably good reasons to hide or at least muddy the information. Owning a race track is not exactly a big money maker these days. Most tracks are living on slot-machine welfare; the tracks’ share of betting handle (“takeout”) covers less and less of the ever-growing amount needed for purses and for keeping the doors open. And betting handle itself has declined steeply in real, inflation-adjusted dollars. So, for most tracks, it’s probably true that no financial news – at least to the public – is good news.

         Now, back to that Churchill Downs Inc. financial report for 2019. For more than a decade, Churchill has steadily become less a racing company and more a “gaming” entity, deriving ever more revenue from slot machines at its tracks and from stand-alone casinos. It also created Twin Spires, the largest US online horse-race betting operation, accounting for about 15% of total US handle. So, for some years actual live horse races – apart from the two days a year of the Kentucky Oaks and Derby – have been, if anything, a minor annoyance for the corporate types at CDI headquarters in Louisville, along the lines of “well, I guess we have to run these damn races to keep our casino licenses.”

         With its 2019 Annual Report and SEC Form 10-K filing, Churchill Downs Inc. completed its transition away from being a horse racing business. Instead of the financial reporting by individual tracks that had been included in earlier reports, CDI has now divided its business into four broad segments, with horse racing unevenly distributed among them: (1) Churchill Downs itself and the Derby City slots emporium in Louisville; (2) “Online Wagering,” primarily the Twin Spires ADW operation, plus a nascent sports-betting business; (3) “Gaming,” which is a mash-up of some straight casinos plus the Presque Isle and Fair Grounds tracks-cum-casinos; and (4) “All Other,” which includes Arlington Park and Turfway, CDI’s two tracks without attached casinos, as well as the new track in Oak Grove, Tennessee, and CDI’s United Tote business. So, four business segments, with race tracks scattered across three of them. I guess it makes sense to the corporate execs, but it’s damn hard to look at the financials and say very much about how the racetrack business is doing.

         At the corporate level, CDI is doing just fine, or at least it was before the coronavirus postponed this year’s Derby and Oaks, delayed the start of Churchill’s spring meet and shuttered all the company’s casinos. The company’s share price, which reached a high of $168 last year before closing out the year at $137, has fallen, like virtually all US stock prices, to a current level of just over $100, but that’s still a huge gain over the past five years; through the end of 2019, in fact, the share price had registered a compound growth rate of 34% a year since 2014, substantially out-performing the broader market.

         Underlying that share price was a steady gain in net revenue, to a total of $1.33 billion in 2019, and in net income from continuing operations, to $216 million last year. Not surprisingly, relatively little of that income comes directly from horse racing anymore. Looking just at net revenue – because the annual report doesn’t show net income (i.e., revenue less expenses) by individual tracks or casinos – the Churchill Downs track accounted for about 15% of the company’s receipts, mostly from Derby-Oaks weekend in May. Twin Spires alone accounted for half again as much – 22% of the company’s total, while the various casino operations including Fair Grounds and Presque Isle and the new Derby City venue in Louisville, pulled in 59% of total corporate revenue. And that “all other” category of Arlington Park, Turfway and United Tote added up to not much more than a footnote, with barely 5% of corporate revenue and a net loss when expenses are factored in.

         The coronavirus pandemic, of course, put a temporary hold on CDI’s continued efforts to grow outside racing. With all its casinos closed by mid-March and with the Derby postponed, net earnings for the first quarter were essentially zero, although revenue took only a 5% hit from last year. And CDI drew down some $700 million from a revolving loan facility in the first quarter, giving it enough cash to weather the year, even as it floated plans to allow at least some spectators at the track for the rescheduled Derby-Oaks weekend September 4^th and 5^th.

         So, that weekend aside, Churchill Downs Inc. is, for all intents and purposes, a casino and online betting company. And that probably suits the top executives just fine. It’s not a coincidence that CDI’s metamorphosis from an entity focused on racing – at one point it hosted lengthy meets at Hollywood Park and Calder as well as at Churchill – to one that’s all about casinos and online betting coincides with the arrival of three alumni of famed corporate honcho Jack Welch’s General Electric Company, a fearsome financial giant in past decades. Both Churchill CEO William Carstanjen and Chief Operating Officer William Mudd came to CDI directly from GE, Carstanjen in 2005, the same year CDI sold Hollywood Park, and Chief Financial Officer Marcia Dall started out at GE before spending some years with insurance companies en route to CDI. None of the three top execs have any particular ties to horse racing, and only Mudd has links to Kentucky. As it turned out, importing three top execs from General Electric probably reflected the CDI Board’s decision to pivot away from racing; if the company were still run by people who actually cared about horse racing, they might not have moved so fast to adapt the company to the new business reality.

         And those top executives have done very well personally while shepherding CDI out of its old reliance on racing and into the new world of casino and online gambling. Last year Carstanjen earned $10.6 million in total compensation – an astonishing 447 times the median compensation ($23,670 a year) of a CDI employee - while Mudd and Dall picked up $5.3 million and $2.6 million respectively. The three top execs collectively own more than $100 million in CDI stock. Yes, the folks in the executive suite did a good job – at least for the shareholders, if not necessarily for the horsemen at CDI’s various tracks – but still, 447 times the median salary?

         Compared to CDI, The Stronach Group and NYRA must seem to be terribly old-fashioned, actually thinking that horse racing is what they’re about. Perhaps they still make money at the race track, but in the absence of public financial reports, we’ll never know, though NYRA’s last public financial reports, in 2015 and 2016, suggested it was pretty close to break-even. Meanwhile, what is clear is that the Churchill Downs Inc. of today would hardly be recognizable to Col. Matt Winn, the Churchill Downs President who, a century ago, made the Kentucky Derby into the world’s pre-eminent horse race. The Twin Spires may still be on the cover of CDI’s annual report, but, recognizing reality, the company is no longer about racing.

Why Trainers Are Quitting the Game

Steve Zorn

(Originally published March 6, 2020, at pastthewire.com)

         Amid all the rest of the chaos in racing over the past few weeks, two of New York’s leading trainers, Kiaran McLaughlin and Gary Contessa, announced that they’re closing their barns and leaving the work that each of them has done for more than 20 years. They’re not leaving racing entirely – McLaughlin has become a jockey agent, and Contessa is hoping to join racetrack management – but they each concluded that it’s impossible to make a living as a trainer, especially as a trainer based in New York, in the current economic environment.

         McLaughlin and Contessa aren’t exactly low-profile horsemen. McLaughlin, who trains for Shadwell and other prominent owners, is the trainer of 2006 Horse of the Year Invasor, as well as Belmont Stakes winner Jazil, Met Mile winner and hot new sire Frosted, and Woodward winner Alpha. In his career, he’s won 1,577 races from 7,707 starts – a 20% success rate – and his horses have earned $120 million. And Contessa was for many years the king of the New York claiming circuit, with 17 race-meet titles as the winningest trainer at NYRA meetings and four New York trainer-of-the-year awards. Over the years, he’s won 2,364 races from 18,147 starts, a 13% strike rate, with total earnings of $84 million.

         But now the economics of racing in New York have caught up with them. Whether at McLaughlin’s elite level or in Contessa’s blue-collar barn, it’s just become too hard to make a go of a job that requires 24/7 attention 365 days a year.

         Over the years, I’ve often chatted with McLaughlin as we watched horses working on the Belmont training track. More recently, I had a long talk with Contessa about the costs of training in 2020. Both trainers were on the Board of the New York Thoroughbred Horsemen’s Association during the 14 years that I was a Director. Here’s what I learned.

         Trainers in New York charge their owners anywhere from $100 (Contessa) to $125 (McLaughlin) a day to care for the owners’ horses. After adding in the other costs that owners bear – vet bills, van charges, insurance, trainers’ and jockey’s fees when horses earn money, etc. – that means a horse has to earn somewhere in the neighborhood of $65,000 a year  in purse money for the owner to break even, but that’s another story. What about the trainer who’s getting that daily fee?

         New York is probably the most expensive jurisdiction in North America, if not in the world, for thoroughbred trainers. Any trainer’s biggest cost is labor. In New York, the minimum wage is $15 an hour. And if the trainer has even one foreign employee on an H-2B visa (temporary foreign workers), then the trainer must pay all employees – not just those on the H-2B visas - the “prevailing wage,” which in New York is $20.20 an hour. And most trainers depend on H-2B visa workers for a significant part of their workers. So, in practice, all but the smallest trainers are paying everyone at least $20.20 an hour.

         So, trainers pay hot walkers $30,000-$40,000 a year, and grooms, who tend to work longer hours, get $40,000-$50,000. In addition, trainers also pay assistants, exercise riders and, in larger barns like McLaughlin’s and Contessa’s, night watchmen. At a ratio of about six horses per hot walker and four horses per groom, and factoring in employment taxes, freelance services like bookkeeping, and workers compensation insurance, Contessa calculated that labor costs alone add up to $109 per horse per day, or almost 10% more than he was charging his owners. And that’s before feeding the horses. Hay, straw (or other bedding) and feed amount to another $23-25 per day per horse. And there aren’t any meaningful economies of scale. Every four horses means another groom; every six means another hotwalker. In addition, trainers buy various supplements, anti-ulcer treatments, etc. to keep their horses in shape, and they buy tack and other barn supplies. Sometimes these costs are passed on to the owners on the monthly bill, but not always.

         So, even without the supplements, tack and supplies, it costs a trainer in New York more than $130 a day to care for each horse. For the 35 horses that Contessa had in his barn early this year, that translates to losing more than $30,000 a month, or $360,000 a year, on the day rate. Now it’s true that trainers do get a share of what their horses earn on the track; the usual figure is about 10% of earnings. Historically, most public trainers have aimed to break even on the day rate and take home that 10% of horses’ earnings to cover their living expenses, their kids’ college funds, their own medical bills, really all the necessities of life. But when you’re already bleeding $30 per day per horse, that formula doesn’t work. Contessa, for example, won 30 races last year, with total purses of $2,352,769. Not his best year ever, but a pretty decent result. But 10% of that wouldn’t even cover his day-rate shortfall. McLaughlin has a bigger cushion, since he probably loses less per day per horse, and since his owners send him more high-profile stakes horses, but even he is no longer confident that training can provide the income he needs to support his family.

         Add to these ongoing issues the effect of recent New York State and federal labor department investigations, which not only required trainers to start keeping accurate time records for their worker and pay overtime but also went back as much as five years to identify workers who had not been paid what the law required. Both McLaughlin and Contessa are facing six-figure fines for past timekeeping and payment errors; there’s no way those amounts can be made up from future earnings.

         And don’t forget the owners who somehow never manage to pay their bills. Recent publicity about Ahmed Zayat’s stiffing Rudy Rodriguez and Mike Maker, and about upstart big-spending owner Phoenix Thoroughbreds actually being a money-laundering operation is just the tip of the iceberg; every trainer I know in New York has at one time or another had to take over ownership of a horse whose owner had stopped paying the bills.

         So it’s no surprise that these talented trainers have finally decided to leave. If anything, the surprise is that so many New York-based trainers are still in the game, mortgaging their houses and juggling the bills to continue taking care of the horses they love. With New York racing currently on hold, as Aqueduct is repurposed into a coronavirus hospital, I suspect we’ll see many more trainers finally accepting economic reality and looking for jobs that actually pay a salary.

OBS Spring – A Tale of Two Sales

Steve Zorn

                  “OBS Holds Its Own as Sales Hum to Life” – Daily Racing Form

“It’s just a continuing move of the industry in trying to get back to normal” – OBS Sales Director Ted Wojchiechowski

         Looking at the industry media’s coverage of the just-concluded Ocala Breeders Sales Co.’s spring sale of two-year-olds in training – a sale delayed from its usual April dates to mid-June because of the COVID-19 pandemic – one might conclude that things aren’t so bad after all. The equivalent OBS sale in 2019 set records, so no one would have expected this year’s offering to improve on that. And, at a cursory glance, this year’s auction wasn’t that bad.

         And it’s true: if one just looks at the gross figures for the sale, well, it doesn’t seem so bad. The most up-to-date figures show that 641 horses were sold (out of a total of 1315 in the catalogue, or 48.7%, compared to 674 out of 1221 (55.2%) last year. Gross sales volume this year was reported as $59.3 million, compared to $72.9 million in April 2019, a drop of nearly 19%. Average price this year was $92,527, a decline of 14.5% from last year, and the median dropped from $60,000 in 2019 to $50,000 this year. And both sales reported three million-dollar juveniles. (These numbers include quite a few “post-sale” private purchases of horses that failed to meet their reserve but were then bought on the sales grounds before their consignors had to ship them back home; final numbers may change slightly from those reported so far.)

         So, if one looked just at those summary figures, it might seem that a bloodbath had been averted, and that the sale was just a market correction after last year’s irrational exuberance. But in fact, this year’s sale was a bloodbath. That’s because the just-concluded auction was in fact two separate sales rolled into one. First, there was the usual OBS spring sale, with 1,231 horses in the original catalogue. Then, tacked onto that, there was a sale of another 84 supplemental nominees, virtually all of them horses that had been listed for sale at the prestigious Fasig-Tipton Gulfstream sale that was scheduled for the end of March but cancelled because of the pandemic. If we look at those two sales separately, then the scope of the carnage becomes much more apparent.

         First, the regular OBS spring sale. Of those 1,231 horses listed, 612 were sold, or just under 50%. Another 124 failed to meet their reserve in the ring and were not sold before they left the sales grounds. The rest were scratched, either before the breeze show or after turning in sub-par breezes. In contrast, last year 674 of the 1,221 horses listed, or 55.2%, were actually sold. Gross proceeds for the 612 sold this year were $48 million, compared to $72.9 million last year, a decline of more than one-third. Average price this year was $78,423, a drop of 27.5% from 2019, and the median dropped to $45,000 from last year’s $60,000. All in all, one could say that this year’s spring sale was off by about a quarter from last year, And, perhaps most important, sellers, mostly pinhookers who buy weanlings and yearlings and then try to resell the horses as two-year-olds, left the grounds with $25 million less than they did last year. That’s $25 million less that they’ll be able to bring to the yearling sales that start up again next month.

         Treating the supplemental auction of Gulfstream sale refugees as a separate sale, 29 of the 84 horses listed in the catalogue were sold, another 13 failed to meet their reserve, and exactly half, or 42 horses were scratched. Many of those were in fact bought privately by bloodstock agents roaming the Ocala area in the weeks before the sale, though typically at prices that just let the consignors break even on their costs and expenses. The 29 horses that sold at OBS brought a total of $11,315,000, for an average of $390,172 and a median price of $280,000. And they included two of the three million-dollar babies in the overall sale, leaving the regular catalogue with just one, compared to last year’s three seven-figure sales.

         It’s probably unfair to compare this year’s OBS supplemental sale to last year’s Fasig-Tipton Gulfstream auction, since many of the Gulfstream horses were in fact sold elsewhere. But last year’s Gulfstream sale did average $493,475, with a median of $375,000, So this year’s Gulfstream-at-OBS results are down about the same percentage from last year as this year’s regular OBS spring sale is from its edition of a year ago. Not counting those horses that may have been sold­ privately, there’s another $18 million that pinhookers had last year but don’t have this year when they go shopping again.

         Two big juvenile sales remain: Fasig-Tipton’s Midlantic auction at Timonium MD at the end of June, and OBS’s June sale, now rescheduled for early July. ­­More of the Gulfstream sale refugees will go through the ring at Timonium, and more two-year-olds will be sold privately or end up being raced by their current owners, but the OBS spring results suggest that there will be a lot less money available when large numbers of yearlings go on sale in the fall. And that means the decade-long decline in the size of the North American foal crop may not yet have bottomed out. If so, fewer foals will continue to mean fewer race days and fewer race tracks. With all the major tracks now returning to racing, albeit mostly without spectators, and with cash-short state governments likely to take a new look at casino subsidies for tracks when those casinos re-open, the outlook for the remaining minor-league tracks is anything but healthy.

        

Two-Year-Old Sale Season

Draws to a Close

Steve Zorn

         With the Ocala Breeders Sales Co.’s July sale in the books, the mightily challenged 2020 two-year-old thoroughbred sales season is finally over, much, I suspect, to the relief of the dozens of pinhookers and sale consignors who weathered this year’s chaos. Whatever spin OBS and Fasig-Tipton, the only major players in the juvenile auction market, put on this year’s results, really the best one can say about them is, it could have been worse.

         First, to recap the just-concluded OBS July sale. This was the third of OBS’s annual juvenile auctions, and it’s the one that usually draws horses with either lesser talent or later birthdays, meaning that they’re not far enough along in training to make the earlier sales. This year, the OBS July catalog included a few refugees from sales that were cancelled entirely by the coronavirus pandemic, though most of those refugees had landed earlier, at the OBS Spring sale, held in early June, or the Fasig-Tipton Timonium sale, held late last month.

         Overall, at the OBS July auction, 521 of the 1,114 horses in the catalog were sold (46.8%), for a total of $15,911,800. That’s an average of $30,541 and a median price of $13,000. By way of comparison, at the 2019 OBS June sale, 615 of the 1059 horses in the catalog were sold (58%) for a total of $21,349,300, an average of $34,714 and a median of $17,000. The declines in gross, average and median were in line with what we’d seen at all the post-pandemic juvenile auctions, a falling-off of roughly 25% from last year’s numbers.

         But when we look at the two-year-old sale season as a whole and take into account the effect of sales that were held in 2019 but didn’t occur at all this year, the picture becomes somewhat darker. Not counting the small regional sales, which don’t have much impact on the national figures, there were three significant juvenile auctions in 2019 that didn’t even happen in 2020 – Fasig-Tipton’s Santa Anita and Gulfstream sales and Keeneland’s April juvenile event. So, this year’s sales calendar was reduced to only four auctions from the seven major sales that were held last year.

         Adding up the figures from all those sales, 1,764 two-year-olds were sold at auction this year, compared to 2,120 last year, a decline of 16.8%. For a sense of perspective, the US thoroughbred foal crop in 2018, when this year’s juveniles were born, was 19,925, a decline of only 3.3% from the 2017 total. So, a lot fewer of the available foals were actually sold at auction this year.

         And adding up the dollars from all the major sales, this year’s two-year-olds sold for a total of $126,824,800, compared to last year’s total of $185,961,500. That’s a decline in one year of nearly 32%, or some $59 million. Sounds a lot like many other sectors of the economy during the pandemic.

         To be sure, some of those missing horses were sold privately, as bloodstock agents roamed the farms and training centers around Ocala. So perhaps the financial loss was a bit less than appears just from the auction statistics. But the year-on-year shortfall is certainly at least $40 million, which is money that pinhookers won’t have as they return to the yearling sales that start up this month and that reach a peak, especially for pinhookers, at the huge Keeneland September sale. The decline in the foal crop from 2018 to 2019 was only 700 horses, or just over 3%, according to the Jockey Club’s best estimate, so it looks like there will be a lot less money chasing pretty much the same number of yearlings. And while the Coolmore juggernaut marches on apace, some of the other traditional big players in the yearling market (think, e.g., Sheikh Mohammed or Ahmed Zayat) have troubles of their own. If only Jeff Bezos or Mark Zuckerberg, or even Bill Gates or Warren Buffett, liked horse racing!

F-T Timonium 2YO Sale –

A Deeper Dive into the Numbers

Steve Zorn

        

         The BloodHorse, ever optimistic, reported that this week’s results from the Fasig-Tipton sale of two-year-olds in training at Timonium MD is “a sign that the juvenile market may be turning the corner.” In other words, the sale wasn’t quite as bad for sellers as the Ocala Breeders Sales Co. auction two weeks ago had been. What corner it is that the market is turning remains, however, to be seen.

         Overall, 303 of the 563 horses in the Timonium catalog were sold, for a total of $23,572,500, or an average of just under $78,000 and a median price of $40,000. That compares to last year’s Timonium sale, held at its usual spot in the calendar just after the Preakness and undeterred by the coronavirus, when 326 juveniles sold for an average of just over $90,000 and a median price of $43,000.

         At this week’s Timonium auction, 72 horses went through the ring but failed to meet their reserve, and another 188 were scratched. So roughly 54% of all the horses originally listed for sale actually found new homes. That’s better than at the two earlier 2YO sales this year, but well below the numbers for prior years.

         And, as in. the case of the recent OBS sale, the Timonium numbers were inflated by the presence of premium horses that had been rerouted from the cancelled Fasig-Tipton Gulfstream sale, the industry’s top market for two-year-olds. At Timonium, 23 of the horses sold had originally been listed in the Gulfstream catalog. Those 23 brought an average price of $133,300, compared to roughly $74,000 for the non-Gulfstream offerings. Once the Gulfstream horses have been taken out of the calculations, we’re left with a decline of 17% from last year’s Timonium average .

         Over the past several decades, two-year-old sales have evolved from a means of selling horses raised on the farms near Ocala – the original impetus for the formation of OBS – into a segment of the thoroughbred market that is principally the domain of “pinhookers” – consignors who buy weanlings or yearlings in order to sell, or at least try to sell, them a year or two later as two-year-olds. At this week’s Timonium sale, for example, 65% of all the horses sold were offered by pinhookers. If they are to have two-year-olds to sell next year, the pinhookers have to return to the yearling market, which in this year’s compressed timetable starts up again in just a few weeks. And, to buy those yearlings , the pinhookers need to have in hand the money they’ve made at the juvenile auctions. So, let’s see how pinhookers did at the Timonium sale. Spoiler alert: it was not a great year for pinhooking.

         In total, there were 196 horses pinhooked horses (horses had previously been sold through a weanling or yearling auction) sold at Timonium.. In addition, 47 pinhooks failed to meet their reserves in the ring and went back to their consignors. And another 21 pinhooks were scratched and never made it into the ring at all.

         So, how did the pinhookers do? Those 196 horses that sold brought a total of $16,814,000. And the amount paid for those same horses as weanlings or yearlings was only $10,087,500. Sounds like a healthy profit for less than a year’s work, right? But wait; one also needs to factor in the pinhookers’ costs for transporting and training the horses and staffing the sales grounds, and the commission on the sales that Fasig-Tipton, like all auction houses, takes off the top. While we don’t know for sure how much each consignor spends to bring a horse to auction, $15,000 per horse is probably a minimum. All that work getting a horse ready to breeze an eighth of a mile in 10 seconds flat requires lots of help on the farm, and grooms, hotwalkers, riders, managers and all the other people needed to staff a farm have to be paid. Not to mention the sizeable capital investments that pinhookers have put into their training centers in Ocala and elsewhere. So, let’s say the cost for those 196 horses at $15,000 apiece was $2,940,000, and the Fasig-Tipton 5% commission was $840,700. That brings the pinhookers’ total costs for buying, training and selling the horses they sold at Timonium to $13,868,200, leaving them with an overall profit – just on the horses that were sold – of $2,945,800. Still not bad, but a lot less than appeared at first glance.

         And that entire profit of just under $3 million was accounted for by just eight “home runs” – horses that sold for $200,000 or more above what it had cost to buy and train them up to the sale. All the other pinhooks, some 188 horses, basically broke even.

         And that’s before we even consider the horses that were scratched or that failed to meet their reserves. The 21 horses that were scratched had cost their consignors $1,370,500 to buy as yearlings, even before training expenses; and, the 47 that failed to meet their reserve had cost $3,435,700, again before factoring in training costs. So that’s almost $5 million in unrecovered capital expense right there.

         Not all those horses are a complete loss for the pinhookers. Some have been or will be sold off the farm, and some will be raced by their owners. But it’s likely they’ll be a net loss for the pinhookers who bought them as weanlings or yearlings; we just don’t know how much of a loss. The aggregate loss will probably be on or close to the same order of magnitude as that $3 million putative pinhooker profit that we just saw at Timonium.

         There’s one more big two-year-old sale on the calendar before the yearling season starts: the OBS auction, scheduled for July 14-16 this summer, with more than a thousand juveniles in the catalog. That sale, held in June in more normal years, is typically the last chance for pinhookers to unload unpromising or slow-developing horses. It’s unlikely we’ll see results there that will provide much reason for optimism when the yearling market starts up later in July.

         Over the past 30 year, the number of thoroughbreds born each year in North America has declined from 40,000 in 1990 to 35,000 in 2000, to 26,000 in 2010, after the financial crash, and to just under 20,000 in 2018, when this year’s two-year-olds were born. Over the same time, the number of races has declined as well, though not by nearly as large a percentage, with the result that average field size has declined from nearly nine horses per race 30 years ago to around 7.5 horses per race today. With pinhookers, who drive the breed-to-sell portion of the thoroughbred breeding industry, struggling to hold their heads above water in this difficult year, it’s unlikely they’ll be fueling a wave of enthusiasm in the upcoming yearling sales season.

         As the foal-crop figures show, breeders have already cut back, and many smaller operations have been pushed out of the business. We haven’t seen quite so much consolidation among pinhookers yet, but this season’s two-year-old sales results aren’t a good sign for the folks who didn’t manage this year to hit a home run or two.