Friday, November 16, 2012

What Were They Thinking? High-Priced Mares at F-T and Keeneland

Now that the fall bloodstock sales are done (look here and here for full results), perhaps it’s time to ask just what was going on at the high end of the market.  While overall results were roughly comparable to last year, correcting for the high-end bump in 2011 from the Edward Evans and Palides dispersals, the top of this year’s market was stratospheric.

Horse of the Year Havre de Grace sold for an astonishing $10 million at the Fasig-Tipton boutique sale, to Mandy Pope of Whisper Hill Farm in Florida, who also bought Grade 1 winner Plum Pretty at Keeneland for $4.2 million. And those weren’t the only extravagant prices. Between the two sales, six mares sold for $4 million or more, and a total of 12 for more than $2 million, not counting the $2.2 million high bid for In Lingerie, who didn’t meet her reserve. 

By contrast, in 2011, only one mare, champion and potential horse of the year Royal Delta, sold for more than $4.2 million (she drew a top bid of $8.5 million, and looked every penny of it at this year’s Breeders Cup), and only five, not counting the Evans dispersal, for $2 million or more.

Multi-million-dollar deals for stallion prospects are nothing new, but a stallion can pump 200 or more babies out onto the market every year. For a mare, in contrast, there are no economies of scale. One year, one baby. And that's if all goes well, which it often doesn't.

So, what were the buyers of those $2 million-and-up mares this year thinking? Is there any way they can reasonably expect to make a profit on their purchases? How much would the mare’s owner have to sell her babies for to get a positive rate of return?

Let’s make some assumptions.  In the interest of simplifying reality, I set up a spreadsheet for the trophy-mare business. Just for the sake of putting some numbers on paper (well, on the screen anyway), here are the basic data:

The breeder insures the mare for a 4% annual premium, starting at the auction value and then reducing the insured value by 10% a year as the mare ages;

Taking care of the mare, including board, vet and other costs, is $25,000 a year;

The average stud fee paid is $75,000, payable when the foal stands and nurses (I may be too conservative here; some of these trophy-mare owners are going to go to the $100,000-plus stallions, but perhaps they’ll get a deal);

The mare has foals in three of every four years, for a total of 12 foals;

Care of the weanling is $10,000 a year;

Care of the yearling, up to the sales, is $10,000 a year;

Sale costs, including the consignor’s and auction company’s cut, sales prep, etc., are 10% of the sale price.

Any one of those assumptions is likely to be way off in any given year, but taken together they’re a reasonable representation of the US cost structure for a high-end mare. So, if that’s the framework, how much would the babies have to sell for in order for the breeder to get her money back?

Let’s start with Havre de Grace. At $10 million, her babies would have to average $1.5 million in the sales ring. And that would be a paltry internal rate of return of 2%. Ain’t gonna happen. So I hope that Mandy Pope didn’t make that purchase in the expectation of turning a profit. And it’s a good thing that the Internal Revenue Service asks all of us in the business to show a profit in only two years out of every seven to overcome the presumption that it’s a hobby. Thank you Sen. Mitch McConnell (R-Horse Racing).

What about those mares that were only in the $4 million-plus range, like Plum Pretty ($4.2 million) and Pure Clan ($4.5 million)? At Plum Pretty’s $4.2 million price tag, all the breeder has to do to break even is sell the yearlings for an average of just over $600,000. Piece of cake, right? And to get a reasonable return on investment, say an internal rate of return of 5%, all the breeder needs is an average yearling price of $900,000. So, municipal bonds are safer, more profitable and more reliable, but, damn, they sure don’t look as pretty as those Thoroughbreds racing across the paddock.

At $2 million or so, it might even be possible that the purchase of a top-level mare could be a sensible economic decision. At that price, the break-even number for average yearling sales prices is about $365,000, and an average of $600,000, which is break-even for Plum Pretty, would represent a healthy 8% rate of return for a $2 million mare.

So why did all those folks pay all that money: 12 mares for more than $2 million? One reason may be that the economics are different outside the US.  Of the 12 mares that sold for more than $2 million this year, only four were bought by Americans: Havre de Grace and Plum Pretty by Mandy Pope's Whisper Hill Farm; Cry and Catch me ($3.5 million) by Charlotte Weber’s Live Oak Plantation, and Grace Hall (($3.2 million) by agent Reynolds Bell for a New York client. The rest are headed to Japan, Ireland and elsewhere in Europe, although Goncalo Borges Torrealba of Brazil, who paid $4.5 million for Pure Clan, apparently will leave the mare in Kentucky, now that he’s entered into a partnership with major US stallion station Three Chimneys.

So the economics of breeding may be different elsewhere; certainly the high purses in Japan suggest that a cash-flow projection might look rosier there than in the US. But for the handful of Americans who paid those top prices, it can’t be about the money. It’s got to be about love of the game. And that’s not necessarily a bad thing.