Otis Written Interview: Part 2
To: Michael Karnjanaprakorn
From: Ed Victori
CC: Amy Li
Subject: Memorandum (Part 2 Otis Written Interview)
OBJECTIVE: Establishing a predictable dividend yield on Otis alternative assets
Necessity for Dividends on Illiquid Assets
Otis is investing in alternative assets with an anticipated holding period of 5-10 years. These alternative assets, by current financial market standards, are highly illiquid and bear limited opportunity to provide dividend returns to shareholders. The early demand for part ownership in these alternative assets is a strong indication that there may exist network effects in the future to help create liquidity and an ecosystem in which shareholders can trade amongst themselves. However, before the market for these assets is robust enough to support this, the shareholder need for realized returns before divestiture or liquidation will grow. The asset types that Otis is targeting has the opportunity to create income for its shareholders through a strategic bundling rental process that mitigates risk, increases brand awareness, and distributes single rental revenues across an entire portfolio of assets.
The Inefficiency of Art Rentals
The market for art rentals is a challenging business model for several reasons, across both mass retail consumers and in the context of ‘high’ art collectorship.
When considering art rentals in the context of ‘high’ art (i.e. art typically bought and sold at auction, or dealt in medium to blue chip galleries) the demand simply doesn’t exist. The motivating factor for purchasing artwork at this level is either one of true art connoisseurship or of trophy collection building. In neither case would it be acceptable to ‘rent’ the asset since the specific motivation for harboring the asset is supremely personal, or incredibly superficial. The individual who collects for connoisseurship is typically financially equipped to make the acquisition, and the individual who collects for prestige makes the acquisition to show that they can. Rental would be out of the question for either collector type.
When considering higher priced art rentals for commercial purposes between galleries/artists and public spaces, hotels, etc.. the costs for transportation, insurance, and installation often leave little economic benefit to the artist or gallery, and therefore extinguish the opportunity altogether. The overhead and potential risk of art rentals for this type of demand isn’t worth it. The promises of potential acquisition opportunities from art being on view via rental has become such a trite and unfulfilled promise in the industry, that it’s often scoffed at today.
When considering art rentals for mass consumption, the disconnect lies in what is considered as fair pricing for fine art. The general public intrinsically values the original fine art found on many of these subscription services in the same way it values framed prints. I make this statement based on experience conversing with thousands of retail custom framing and fine art print customers over the course of 5 years. The market for fine art rentals is a space that many entrepreneurs have historically attempted to “figure out” and democratize for the masses. The subscription model that works for many other items theoretically made sense for artwork, however consumers were not willing to pay the amounts that made the business model sustainable (covering transportation, installation, insurance and artist compensation costs). Operating this type of business with a high level of customer service, at a price that mass consumers are willing to spend, was a losing battle. Everyday consumers don’t value the temporary ownership of fine art. We’ve seen this play out with the failures of Thiel-backed Artify.it, and the ultimate failure of Artsicle. Other players that still exist (Turning Art, RiseArt, GetArtUp), offer a range of services beyond art rentals, and primarily focus on highly decorative and fairly irrelevant artists in the context of today’s contemporary art culture.
Personal Experience with Art Rentals
I speak to the aforementioned inefficiency of art rentals because I’ve experienced it personally on every level. I have been the brokering party for art rentals of $40,000 paintings, which ultimately yielded headaches and little economic gain for the managing parties. I have observed everyday consumer responses to the value propositions of both original fine art and mass produced reproductions, and their minimal discern for the differences between the two. I have signed up for every art rental platform that existed between 2016-2018 and experienced the pricing and customer experience of them all. None delivered quality artwork, period. Most are out of business today.
However, there is a market that can actually support fine art rentals -- it’s just small and highly specific. It exists somewhere at the intersection of wealth and prestige, with consumerism and market intrigue. Visiting galleries and museums is considered a ‘fancy’ and ‘cultural’ activity, and has nothing to do with collectorship or ownership. If this experience can be recreated for a very specific audience in a very specific place, then the opportunity to earn revenue exists.
Finding the Right Audience & Setting
There is a shift in retail towards experiential activations that seize consumers’ senses and feed their instagram story creations. In my work at Storefront, I observe this shift pushing towards corporate events and activations. It is often the case that older larger corporations eventually follow suit in whatever the younger vibrant brands are doing. Corporate event planners will continue to employ top chefs, capture big sponsors, and setup yet another step & repeat, but the shift in experience within corporate events will change, evolve and mature.
By partnering with specific corporate event rental venues, the notion of an “Otis-curated Reception” can be possible. Otis can transport, install, and insure a collection of artwork and objects in a space, with museum-style description cards and a tasteful display on the history of the assets and the opportunity that the company is creating. The temporary exhibition of these assets aligns with the mission to constantly share them with the world, and introduces the value proposition of Otis to new audiences that would otherwise not be tapped.
Why Otis Should Care: A Case Study
Through a highly strategic rental model, establishing a stable and predictable dividend across the portfolio is possible.
Defining Dividend Yield
The dividend yield is the ratio of a company's annual dividend compared to its share price. The dividend yield is represented as a percentage and is calculated as:
The annual dividend used in the calculation could be the total dividends paid during the most recent fiscal year, the total dividend paid over the past four quarters, or the most recent dividend multiplied by four.*
As a benchmark, I will use the current average dividend yield for the S&P, which is 1.78%**
Rental Venue & Process
The High Line 9 is a new gallery of exhibition spaces located under the High Line on West 27th Street. I am familiar with this space because I personally developed a relationship with Karen Wong, Director of Related Group, in sourcing these spaces for short-term rentals on www.thestorefront.com. See the gallery spaces here: https://www.thestorefront.com/listings/22444
There are 9 pristine art gallery spaces which are rented on a short-term basis by contemporary art dealers, arts organizations, brand collaborations, and private organizations. Some of the higher profile renters include Paul Kasmin, Zaha Hadid, Hollis Taggart, De Buck, Artsy and Artnet. Past public events can be viewed here: https://highlinenine.com/exhibitions/past
Pricing on rentals of these spaces varies depending on duration and renter type. Exhibition rentals for an entire space can range from $30,000-$60,000+ per month. The interesting area for Otis are the private corporate event rentals which run a minimum of $15,000 per evening in the larger spaces. Through a collaboration between Otis and HL9, rentals for private events can be offered as either a “blank white space” or as an “Otis-curated space” with varying package options for cultural assets to be on display in a highly tasteful and thoughtful installation. As an operator of a smaller contemporary gallery space in Chelsea which is rentable for corporate events, the demand for interesting curated spaces is high, so long as the type of work can be expected and reviewed. The potential add-on cost for Otis to curate and furnish the space can be within the range of $7,500-10,000.
Economics of the Partnership and Dividend Yield
Event Rental Price: $15,000
Otis-curated Add-on: $7,500 (example portfolio in Table 1.0)
Transportation & Installation per event : $3,500***
Conservative projection: 6 events per year
Total Revenue: $45,000
Total Cost: $21,000
Annual Income: $24,000
See Table 1.0 for a calculation of dividend yield on each asset with an annual expected income of $24,000. Average dividend yield with modest assumptions is calculated at 3.48%, reflecting a 95% higher yield than the average S&P yield.****
Table 1.0
* source: investopedia.com/terms/d/dividendyield.asp
** source: https://www.multpl.com/s-p-500-dividend-yield
*** estimate of $3,500 assumption based on professional art transit, installation, & logistics experience
**** Excel model available on demand for scenario analysis and adjustable inputs and assumptions
Conclusion
Ultimately, there is opportunity to continue sharing these assets in spaces for both public and private consumption with a sustainable revenue model to support significant dividend yields for shareholders. What we can continue to create is exactly what Michael has envisioned: “a culturally relevant, community-owned museum, powered by the people in the community.” This museum will just take many different shapes and forms as the portfolio grows.
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