Tuesday, October 23, 2012

At Investor Day, Forest City executives praise arena performance, say Prokhorov loan paid off, more sponsors coming; leave hint that share in Nets may be sold

The discussion at yesterday's Investor Day, held by Forest City Enterprises at the Barclays Center arena, ranged far beyond the first Atlantic Yards tower and plans to build outside the railyard, concerning overall corporate strategy and, especially, the arena itself.

Executives at subsidiary Forest City Ratner described themselves as delighted with the appearance, performance, and future of the arena, of which they own 55%, and said all debts to partner Mikhail Prokhorov's Onexim have been paid off.

Forest City and CEO Bruce Ratner sold 80% of the New Jersey (now Brooklyn) Nets to Onexim, and may be interested in selling that remaining 20%, given the sure rise in value of the team and the fact that it's hardly a core business.

"We're currently evaluating the economics of the team in Brooklyn," executive Jim Lester said obliquely, according to the webcast. "As [arena/team CEO] Brett [Yormark] said, the sales going well. Player salaries are expensive, and the new CBA penalizes franchises for having hefty player salaries,  so we're working through that now."

That didn't sound like a robust commitment to maintaining ownership.

Executives also hinted that the number of employees working at the arena would shrink somewhat, after an effort to make sure the opening events worked well.

Enter Bruce Ratner

After being introduced with praise from CEO David LaRue, Bruce Ratner declared, with perhaps faux humility, "There's no I, it's really we." Though he went on to understandably credit the backing of the parent company, it is undeniable that slides at the arena have called it "The house that Bruce built."

"We overcame a lot of odds, and it turned out great," said Ratner, citing both hard work and luck. "The hard work was going through 35 lawsuits"--actually, 35 legal decisions--"getting these thing financed in an impossible market, selling the team to an incredibly wonderful Russian partner, and a lot of other difficult things that we overcame."

The luck, as noted in the post about housing, regarded the booming Brooklyn market.

The arena

"This particular place you're sitting in now, turned out great," Ratner said. "When I actually stepped in here... came back after Labor Day, and I saw the place cleaned up, and I almost cried."

"The reception's been far greater than I thought... everybody's been here cannot believe how beautiful it is, how wonderful the employees are. And, of course the programming has been extraordinary...
we got 30,000 applications, from the projects.. we hired 1800 people, approximately a third are from public housing."

"The arena is also, I think, a very good money generator, in a way... It is a very interesting type of real estate.. contractually obligated revenue... long term leases like the naming rights, middl- term like other kinds of sponsorships and suites and boxes, and short-term stuff like the food... What you have here is a piece of real estate generating regular, portfolio type of income."

He noted that the company AEG, which operates the arena along with Levy Premium Foodservice, is selling its portfolio of arenas (but doesn't own this one, obviously), so Forest City will be watching that.

Enter Yormark

"The maestro of getting all that income is some young man named Brett Yormark," Ratner said, introducing the arena/team CEO as probably the outstanding CEO in sports and entertainment. "a master at generating income."

From the slide show for investors
Yormark said, "I think Bruce said it well: we've over-delivered," citing ten sellout concerts, the first gospel show, the first family show, and welcoming over 225,000 people through this building. The goal, he said, "is to do over 200 events"--I thought it was 225--and 205 have been booked.

"I think the Barclays Center has certainly become a destination," he said, citing the accessibility of the building.

The arena surveys visitors. "Close to 75% of the fans have come via mass transportation," he said, not specifying which event(s) to which that referred. (That number has not been corroborated by the MTA.) "I think we've mitigated any concerns of traffic congestion here in Brooklyn. People are voting yes for the transit and finding it very easy to get to the Barclays Center."

He cited "36 key Brooklyn vendors" and the "strategic alliance with the Disney Institute" to train staffers.

More sponsors

"From a sales and marketing perspective, our sales have been very robust," he said, noting that two more sponsors would be named, on top of the ten founding partnership deals.

"But we're not stopping there," he added. "I recently walked the building over the weekend: there's a lot of inventory to sell and market, and thankfully, we've got an incredible amount of interest."

As for suites, "we are at 90% of our annual lease budget." They're also offering nightly rentals, with the aim to hold back eight suites. On opening night with Jay-Z, some suites raised over $30,000. "We'll do the same for the upcoming Nets game."
From the slide show for investors

Arena ownership

Forest City executive Jim Lester explained the ownership of the arena holding company. (The state actually owns the arena, for purposes of issuing tax-exempt bonds, and leases it for a song.)

Prokhorov's Onexim owns 45% of the arena, while the 55% owned by Nets Sports & Entertainment is divided among Forest City and other investors.

Arena project costs

Lester offered a somewhat confusing--to me--explanation of the costs behind the Barclays Center, which is commonly called a $1 billion building but here was described as a $934 million project.

The $934 million cited, Lester said, "covers the cost of this building, the transit connection, the site work, etc."

From the slide show for investors
"It was funded by PILOT proceeds and public subsidies of $507 million," he said, which was rather confusing, since the PILOT bonds themselves were supposed to raise $511 million, and the $280 million or so in city/state subsidies for infrastructure and land were supposed to be for the arena.

He noted that Onexim put through part of an 11% mezzanine loan "at the initial time of closing" and "we've effectively paid it off."

Lester made no mention of whether any of the $228 million in low-interest funding Forest City raised via the EB-5 immigrant investor program has been used to replace any of that loan.

Alternative numbers

From Merritt & Harris
The consultant to the arena bond trustee, Merritt & Harris, has provided an alternative explanation for project costs, deeming the arena, transit connection, and infrastructure as costing nearly than $845 million.

As I wrote 8/24/12, the document indicated $617.3 million in hard costs for arena, site work, and transit connection construction, and $192.85 million for soft costs, plus $34.7 million in additional costs, such as accounts payable and financing.

Omitted were costs for the railyard and land purchases.

Contractually Obligated Income (COI)

As of September, the COI was at about 75%; yesterday the number was at 79%. That includes sponsorships, suite sales, and other guaranteed revenue from food and beverage. It represents about 72% of the total arena income.

"The early years are ramp-up period for us," Lester said. "We wanted to be sure to open right, so some of the staffing levels, et cetera, have been higher than we would anticipate over the long term."

From the slide show for investors
He noted that PILOT bond payments start at. about $30 million, escalate 2 to 3 percent a year

Now 55% of revenue flow to flows to Forest City. It gets paid first to Forest City, until member loans are repaid, as those loans have priority over Nets Sports & Entertainment Equity.

From the preliminary offering statement for the bonds: note that PILOTs eventually rise to $55 million.

The Brooklyn Nets

"I think it's fair to say, en route to Brooklyn our goal was to always have a very good team," Yormark said, allowing that it took a while, but "I think we finally got it right in July." He cited "an incredible brand transformation April 30" and the signing of free agents and re-signing of star Deron Williams.

From the slide show for investors
There are "approximately 11,000 season ticket holders, in comparison to 4,400 last year" and, "rather than discounting," costs are up. "About a third of season ticket holders are contracted for three years," he said, citing about 4,000 All-Access passes sold.

"As far as sponsorships, we've tripled the number that we left New Jersey with last year," said, saying they were "on pace to hit budget... global brands, national brands, and believe it or not, uncovered a number of pretty stout companies in Brooklyn we weren't working with before."

The opening game against the Knicks Nov. 1, he said, should be "the biggest gate ever in the history of the franchise, over $2 million." With gate receipts tripled so far over last year, the Nets are now in the top five in the NBA in terms of gate revenue.

"The new badge of honor in this borough is black and white," Yormark said, citing the team's colors. He also cited the boom on the YES sports network.
From the slide show for investors

"We've got a lot of work to still do, but we've got a positive trend," he said. "As long as the team is relatively successful, I think we'll have a great, great season."

Lester noted that Nets Sports & Entertainment no longer has to fund team operating losses and added, as noted above, that they were "evaluating" the economics of the team.

A message to investors

CEO LaRue early on invited the investment analysts and other guests to "see the new facility, take a tour, and stay for the Rush concert."

"We hold ourselves very accountable to you, our investors, to ourselves to achieve the results, and again to drive value creation," he said. "We evidence that by improved disclosure... we execute on that strategy, and we measure ourselves against that."

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