Positive results at last year’s Keeneland September yearling sale signaled a long-awaited light at the end of the tunnel for a Thoroughbred market that had staggered through dark years since the global economic crisis of 2008 struck. The 2012 September sale results, along with other recent indicators, reflect a newfound financial strength for a signature Kentucky industry where expectations are growing that the production cycle it is entering will be very prosperous.
There is an understanding of what was lost and a readiness to fight another day.
“This business has always been a function of supply and demand,” Keeneland Association President Bill Thomason said. “Because of the new stability of the economy, shortage of horses (in the market) and knowing the time it takes to get horses to a productive stage of racing, logic tells us we are at least in a three- to five-year timeframe of what should be a very strong equine market.”
During the recession, he explained, breeders took their less economical mares out of production, eliminating the lower end of the market and causing a significant decrease in the foal crop.
“Since the record foal crops we had in 2006-2007, it has dropped from nearly 35,000 foals to now stabilizing at around 22,000 to 23,000 foals. So we had a 38 percent drop in our foal crop during the economic downturn,” Thomason said.
The much-stabilized economy along with the significantly decreased foal crop contributed to the September sales’ strong results, he said.
“Last year at our September sales – where the world comes to buy horses and which is the barometer for the sales market – our sales were up 28 percent, the highest since 2008,” Thomason said, “and our average was up 17 percent, the highest since 2006, and we had a record median.”
Industry stability for the long term
The auction sold 18 yearlings for $1 million or more – the highest number of seven-figure horses at that sale since 2008. Fifteen of those 18 yearlings had different buyers, reflecting a diverse group of horsemen eager to re-commit their dedication to the industry.
“As the economy improves and as (racetrack) purses have stayed stable, logically demand goes up for the horses that are left – the market has less horses to select from,” Thomason said. “That’s what we think happened last year. … We sold less horses for more money because there was greater demand for those horses since there were less to choose from.”
And nothing can be done in the short term about the supply of horses. From the time a mare is bred, it’s a four- to five-year production cycle before her foal makes it to the racetrack, he said, so the market figures to be on the upswing for at least that period of time.
Fasig-Tipton President Boyd Browning agreed the Thoroughbred market’s rebound could be largely attributed to the decrease in product being produced. Like Keeneland’s September Yearling Sale, the recent Fasig-Tipton July yearling sale reflected positive trends, with increases in gross sales and average prices over last year’s figures.
“The overall market had a dramatic downturn from 2008 to 2010, with probably a 40 to 50 percent reduction in gross sales and volumes for most participants,” Browning said. “We’ve got a much better balance between supply and demand overall now, which has tended to lead to prices increasing from the bottom to the lower levels.”
Browning doesn’t expect there to be dramatic increases across the board in the value of horses in the near future, but he does believe the market will maintain a level of stabilization.
“We’ve had some retrenchment, and I think people feel a reasonable level of confidence and have reasonable expectations – whether they’re buying or selling horses – as to what the market is,” he said. “Most sellers would prefer it to be a little bit stronger, and most buyers would prefer it to be a little bit weaker, which means it’s probably pretty healthy overall.”
New entrants to racing buying aggressively
More proof of the improving Thoroughbred market is the fact there has been a significant increase in both domestic and international growth. Investors from both North America and overseas have burst on the scene at recent auctions, bidding aggressively to obtain stock for their newly established Kentucky operations.
For example, Chileans Liliana Solari and her son, Carlos Heller, recently bought the prominent Lexington farm formerly known as Vinery under the name Haras Don Alberto for $13.82 million in October 2013.
Heller’s family has business interests in the airline, retail, health, banking and television industries, and he is president of Club Hipico de Santiago, the historic Thoroughbred racetrack in Chile.
The leading buyer at last year’s Keeneland November breeding stock sale, Heller and Solari purchased 32 horses for $10.64 million. The duo said at the sale their aim was to acquire well-bred mares in foal to successful stallions with the goal to develop a racing operation to compete in the biggest events in North America, including the Kentucky Derby.
Industry newcomer Nat Rea of Canada also made a significant investment in the local market when he bought Silver Springs Farm near Paris, Ky., two years ago, and then recently acquired a portion of Hopewell Farm in Midway, Ky., for $5.2 million. Rea has been active at both Keeneland and Fasig-Tipton sales in the last year to build up his operation. One significant purchase was a $1.45 million yearling filly by Kentucky Derby winner Street Sense.
Rea recently retired from Martinrea International, an auto parts company he founded and later sold. He resides on a ranch in Woodbridge, Ontario, Canada, where he keeps Quarter Horses and cattle.
Other new players in the Kentucky Thoroughbred breeding game include Jose Luis Espinosa, a Mexico native and an oil and gas engineer in Texas and Oklahoma, who bought Richard and Audrey Haisfield’s Midway-based Stonewall Farm for $7.5 million in 2013; and very significantly there is Forbes 400 member Brad Kelley, who is leasing the renowned Calumet Farm in Lexington from the Calumet Investment Group, which bought it in May 2012 for $35.93 million.
Kelley entered the industry under the name Bluegrass Hall in 2009, and since early last year has been racing and breeding under the Calumet banner. While it was owned by generations of the Wright family from the 1920s to 1991, Calumet was represented by a record eight Kentucky Derby winners and two Triple Crown winners.
“He loves the game. Loves, loves the sport,” Calumet farm manager Eddie Kane told the Daily Racing Form of Kelley, who is an extremely private individual. “He’s a big horse racing fan, and it means a lot to him.”
Kelley, the Tennessee-based founder of the discount cigarette company Commonwealth Brands, is now carrying on the legacy of the famed Calumet by buying and campaigning such stars as 2013 Preakness Stakes winner Oxbow. With a reported intention to return Calumet operations to top form, he has made significant investments at Kentucky Thoroughbred auctions in recent years, including spending $4.968 million on 49 horses at the 2013 Keeneland November breeding stock sale.
Financiers mount back up, too
With such a versatile new cast of investors in the local Thoroughbred industry, it appears the ability to obtain loans for large equine acquisitions should be on the rise following the national economic slump.
But Browning of Fasig-Tipton said the cost of production remains high, and there are few credit facilities available for commercial Thoroughbred breeding farms to obtain capital to expand their foal crops.
“(Lending) has been a challenge, because the (Thoroughbred) market shakes up every three to five years,” PBI Bank Senior Vice President Bob Feenick said. “When you think about the fact it takes my customers almost two and a half to three years to make a profit from inception to market, it’s a long, cyclical situation. The financial markets are still working out the process. But nothing convinces anybody more than performance, and the market has been good – we’ve been very fortunate.”
During the Thoroughbred market’s current upswing, Feenick said, PBI has been “actively building business” with its equine clients.
“It’s one of those markets where, usually, when it’s good, it’s good for awhile,” he said. “We do a good amount of research on supply and demand in the market for our customers. … You have to have the right appetite at the right time. As a bank, you try to be as consistent as possible to deliver a good product to the customer, and that’s what we intend to do.”
Ted Berge, senior banker with Chase Equine Financial Services, which also serves several major Thoroughbred industry clients, said in some ways financing is no different than it was prior to or during the recession.
“We have the same type of criteria we’ve always had,” he said. “It might be somewhat easier for folks in the Thoroughbred breeding business to make money these days than it was in the past three or four years, and as a consequence it might be easier to meet our standards.
“I think there has been some more activity in terms of acquisition financing in the last couple years than there was during the depths of the recession, but we’ve had clients buying and selling in all markets,” he added. “For the most part, that’s what our clients did. … They weren’t just opportunistic purchases.”
Breeding price model innovation
While some Thoroughbred industry players are making new investments, other veteran operations are reaping the benefits from changes they made to their business models when times were tough.
B. Wayne Hughes’ Lexington-based Spendthrift Farm took a different approach than most when it created two new breeding programs in the midst of the economic downturn. “Share the Upside” allows breeders to earn a lifetime breeding right to a stallion by breeding multiple mares to him early in his career, while “Breed Secure” allows breeders to pay stud fees from a resulting foal’s sale price – and only if the foal sale is profitable.
“We felt like we had to find a way to help breeders out,” said Ned Toffey, Spendthrift’s general manager. “Otherwise, we didn’t think there would be anybody left to breed to our horses or anyone else’s.”
Such programs have helped put Spendthrift back on the map in the stallion game, as has the recent success of its stallions. The farm’s most prominent sire, Malibu Moon, sired 2013 Kentucky Derby winner Orb and ranked fourth last year on the general sire list. Spendthrift’s roster of freshman stallions have also helped boost its breeding program.
“We saw very good numbers in our breeding shed this year and we’re happy with how our first-year stallions were received,” Toffey said. “I think that’s a good indicator things are going in the right direction (with the market). As things got tough, people played it safe and got off of the first-year sires. But that seems to be coming back.”
Toffey added that as the economy has improved, it’s been tougher to buy the kinds of horses in which Spendthrift prefers to invest – which could be viewed as a good thing.
“People who were sitting on the sidelines have jumped back in,” he explained. “(Auctions) are starting to get a lot more competitive.”
Though painful, the latest economical downturn provided valuable lessons for horsemen to prepare for the road ahead – whatever it may bring. The industry may never return to what it once was, but most would agree it’s the healthiest it’s been in recent memory.
“This downturn has been so different from the others,” Thomason said. “It’s been so prolonged, the recovery has been slower, and lessons have been learned and reinforced throughout the entire economy.
“We still don’t see people resorting to old practices,” he added. “They are still being conservative with cost of production and breeding fees, and we haven’t seen any indication of mares being brought back into production. I would say long-term prospects for a better control of supply and demand are better than I’ve seen in my career.”
Keeneland returns to dirt surface, will host 2015 Breeders’ Cup
For the first time in its 30-year history, the prestigious Breeders’ Cup World Championships will take place at iconic Keeneland Racetrack on Oct. 30-31, 2015. International competition will run 13 Grade I races featuring $26 million in purses on the Lexington oval.
Breeders’ Cup officials anticipate crowds of 40,000 to 50,000 at Keeneland and plan to offer 21,000 reserved seats as well as general admission tickets. The track will increase capacity with 7,000 temporary luxury box seats and other provisional seating, and announced plans for a month-long festival to kick off the Breeders’ Cup with concerts, hospitality tents and other entertainment still in the planning stages.
In July, the Lexington racetrack began the process of returning its synthetic main track to a dirt surface, a move many believe was designed to attract the Breeders’ Cup when it was announced. A team of experts who consulted with Dr. Mick Peterson, executive director of the Racing Surfaces Testing Laboratory, worked more than a year testing materials, water drainage systems and racetrack design for the new surface.
Construction was scheduled to be completed Aug. 15. Keeneland reopens for training Sept. 1 and the Fall Meet begins Oct. 3.
It was major news also when Keeneland got the go-ahead to become Kentucky’s third racing facility to offer historical wagering machines called Instant Racing. Though initially slated to open in July 2015, plans to build a 40,000-s.f. Keeneland Event Center to house the 600 new wagering machines have been delayed.
Churchill Downs additions include nation’s largest TV
Churchill Downs guests this year are getting a new, larger-than-life digital experience on the Louisville track’s recently unveiled $12 million Panasonic 4K high-definition video board. The largest 4K video board in the world sits 80 feet off the ground and measures 171 feet wide by 90 feet tall.
Grandstand patrons at Churchill also used the new 2,400-seat Grandstand Terrace and Rooftop Garden. It offers updated amenities including new food and beverage and wagering locations, VIP sections, gathering spaces and new or renovated restrooms.
“Since 2001, Churchill Downs has spent close to $180 million on renovations and improvements at our track that have contributed greatly to the recent growth of the Kentucky Derby, Kentucky Oaks and all of Kentucky Derby Week,” Churchill Vice President of Communications John Asher said.
Esther Zunker is a correspondent for The Lane Report. She can be reached at [email protected].
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