The value of a stadium entertainment district

Today the Royals will reveal more information about the two proposed locations for a new ballpark, which is about more than just a new place for the team to play. In many places like Wrigleyville or The Battery Atlanta, teams have entertainment around the stadium, though these two examples are very different. Wrigleyville grew up organically over time, but The Battery is more like what the Royals would be doing to make a lot more money by owning and developing the land around the field - a district with restaurants, shops, offices, and housing. The Royals have pledged to put up a billion dollars for the district portion of their proposed project in either East Village or North Kansas City.

The Braves were spun off of Liberty Media, a publicly traded company, meaning they have disclosed some of their finances, giving us a peek at the revenue they are generating off of The Battery entertainment district. There are two major advantages to these entertainment districts for the team. That revenue is not shared with other MLB teams in any way, and income from monthly rents is much more stable and collected year round rather than seasonal baseball revenue. The baseball operation still generates WAY more revenue than what they refer to as “mixed-use development revenue” in financial disclosures. So far this year, the Braves’ baseball ops have generated $272.5 million through the first six months ending June 30th, while the entertainment district has generated $28.6 million. That is slightly deceiving however as the baseball arm is not worth ten times as much because of the margin differential.

Operating and profit margins can vary widely based on the type of company and their product or service that they make/provide. Baseball operating costs are very high because players make a lot of money and stadiums are big and expensive to run and maintain. The baseball ops operating income (OIBDA) on that revenue is only $10.58 million. Without getting into the corporate finance weeds and operating margin, that profitability rate will accelerate through the rest of the season, but so far their operating margin is only about 3.9% of revenue.

The Battery Atlanta OIBDA is $16.40 million for the same six month period, an operating margin of 57.3%! The money generated after building those districts up mostly gets through to operating profits, and then the total profitability is dependent on debt service costs. They look pretty highly leveraged, but that might be because debt was cheap at the time, so debt service might still be relatively low. I could go into more detail on the debt, but I doubt many people care. From a cash flow perspective they are very good assets to own as long as occupancy rates remain high. From an operating income multiple valuation perspective, that makes the Braves entertainment district worth $300 to $600 million dollars based on what multiple/classification you use for it.

In Atlanta, the book value of their entertainment district according to their balance sheet is just over half a billion dollars. The stadium and other assets held by baseball operations are nearly double that. There are issues using book values, but we can safely assume either they spent a lot more on the stadium or that they own a smaller percentage of The Battery. From what I can tell, the original budget was 60% stadium and 40% entertainment district. If the Royals are going to put roughly a billion into each aspect, and then are able to generate similar revenue/operating margin structures, then the entertainment district will be more profitable than the stadium and team, at least in the near term, for several reasons.

From the disclosures before the spinoff from Liberty, we can see how the Braves’ revenue and profits looked, but we cannot split out the baseball operation versus the entertainment district.

Ignoring the anomalous 2020 season, Truist Park and The Battery Atlanta entertainment district opened in 2017, and you can see that revenues jumped by about $120 million (47.3%) from from 2016 to 2017. Attendance jumped by about 6,000 per game, and they have consistently been in the top five in attendance in the league due to their quality of play. Winning the World Series in 2021 was pretty good for business too. I wish we had more detailed financials going back so that we could see what, if any, change in the revenue mix occurred from this. For now we can only look at the newer disclosures for that.

The Braves revenues break down like this so far this year:

Baseball event revenue - $163.5 million

Broadcasting - $69.4 million

Retail and licensing - $24.1 million

Other - $15.4 million

Mixed-use development - $28.6 million

This is the sort of thing you can watch over time and see how winning pays off from a financial perspective, but we have not had teams that were publicly traded as their own entity to do that well, so the Braves will end up being the test case after a few years of data are collected. For the Royals, the revenue percentage for broadcasting is going to be higher and baseball event revenue lower due to lower ticket sales. I would also be interested in seeing how the increases in baseball event revenue are correlated to the mixed-use revenue. I assume that the entertainment district rents go up for a team that can consistently draw more fans to the area, but I don’t have any hard proof to back that up. That should increase the incentives for making a competitive team year in and year out.

Using this we can estimate Royals baseball revenue to some extent. There are several different places that try to show the cost of a family going to a game - Moneygeek did a study, and Statista has some data as well. They are actually closer to showing the cheapest way for a family of four to go to a game than the average though, so they are not exactly what I would want. Both show that the Royals cost to attend a game is not a lot different than the Braves. However, the Royals are drawing 41% of the fans than what the Braves are, so that would put the Royals’ game revenue around $65 to 70 million through June, and on pace for the low hundred million range. That will make their $90 - 100 million in estimated payroll about 80 something percent of their revenue.

The Braves’ payroll is going to be over $200 million according to Spotrac, that’s going to be about 70% of their baseball revenue, and can see why the margin is lower than on the entertainment district. Game day and broadcasting revenue barely covers player payroll. They have a few more months to generate revenue on top of those numbers though, so the overall margin will be healthier. If you are the Royals, this structure also looks different due to luxury tax rules. In February, or at latest March, the Braves will be putting out an annual report for the first time as their own entity, which should provide more clarity on some things like that than the quarterly report did. They will be paying into the luxury tax, but I don’t know how much or how they classify it on the financials.

The main thing to remember after all of this, and as we see the Royals plans start to take physical shape tomorrow, is that money is fungible. Let’s say the Royals ask for $500 million in public funding for the ballpark, then they pay $500 million for the park from the own pocket in addition to the $1 billion for the entertainment district. It would be easy to say that taxpayers are not subsidizing the entertainment district part. But if the Royals paid $750 million for the stadium and $750 million for the district while taxpayers picked up $250 million for each, the same amount is being publicly subsidized. Any public funds offset a part of the total project cost, not just the portion they say the money is going toward. All of that reduces their denominator on equity put into the project, which increases their returns and ROE on their financials going forward.

That district is going to generate a lot of dollars for the team most likely, and will hopefully help them to put more back into the product on the field. I am interested to see the proposal and how all of this shakes out. It is very far from a done deal, but in general I assume the rich and powerful folks will get what they want. I do see value in having pro teams in your city, and I would enjoy a downtown park too, so it is not that I am completely against it. I am just not a fan of the regular citizens subsidizing rich people’s businesses, and then watching those people tout their hard work and business acumen. It’s a lot easier to make money if you already have a lot of money.