Sunday, October 20, 2013

Barclays Center more prominent than profitable: was first year a loss leader?

Well, I wrote last month that the Barclays Center was less profitable than hoped and not expected to achieve revenue "stabilization" by 2016, when the New York Islanders arrive. Also, I noted they were moving the goalposts: as of March 2012 Forest City Enterprises executives were predicting stabilization by 2014, the second year of operation.

But Eliot Brown of the Wall Street Journal crunched the numbers and found that arena revenues significantly lag projections, in Brooklyn Arena Is Glitzy, but Profits So Far Aren’t Golden: Profitability of Barclays Center Raises Questions About Similar Projects in Other Cities.


While Forest City Ratner in bond documents projected "more than $76 million of operating income in its first year of operation, according to bond documents," the first nine months add up to $19 million, on pace to produce $25 million, well below the $29 million in annual debt service.

From the bond offering statement
Updated and corrected: I'm told the the naming rights agreement and sponsorship agreements. *are* part of the operating income.

Loss leader?

The Journal reports:
Forest City executives say the shortfall is largely the result of their spending more than expected to make a big splash in the first year, investing heavily in marketing, customer service and securing top acts. They point out that Barclays was ranked the top U.S. concert venue for ticket sales in the first nine months of 2013 and second globally, and that the arrival of the New York Islanders hockey team in 2015 should help. They added that fourth-quarter operating income is expected to be stronger.

“We’ve made an amazing first impression,” said Forest City Chief Executive MaryAnne Gilmartin, who predicts annual operating income will be $70 million by 2016. “Now, we turn our efforts toward calibrating the operating expenses.”

But arena experts say boosting income by that amount will be difficult. There are tight margins in the concert business, and the arena faces a competitive marketplace, particularly from Madison Square Garden, which has been closed since the early summer for a renovation.
What to blame

The question then is whether the Barclays Center cost too much to build or to operate, or whether it's offering lucrative deals to performers.

The article hints the arena, "wrapped with rusty steel," may have spent too much. Maybe. It cost $54 million and was made, as Forest City executive Bob Sanna would say, "for public reasons" (in other words, to win over critics), so there was a calculation there.

It clearly cost more to operate than it will in the future--the article hints at a few relatively minor cuts, and reduced expenses of some 15%, which I'll discuss tomorrow.

“We can easily reduce our expenses by 15%, if not higher,” said Brett Yormark, CEO of the Barclays Center, adding the arena’s first 12 months have “exceeded my expectations.”

(He's said the arena need not market as much in the future, which surely makes sense. Some of the spending on acts and other flourishes might be considered a marketing expense.)

Those 2000 $15 Nets tickets are now $25--which adds up to only $900,000 a year, but there are many other increases.

I suspect--but can't be sure--that the major drag on revenues was, as the WSJ put it, " generous deals to woo big names, either by offering low rent or by guaranteeing a performer a high portion of ticket sales."

That in many ways may have been money well-spent--the arena was the highest-grossing, and busiest, American arena, even if Madison Square Garden earned more per ticket. That means acts would be more likely to come back to play, and the Barclays Center could then drive tougher deals.

When the Islanders come

The Islanders' arrival seems to be correlated to revenue stabilization, but, as the WSJ reports, the Islanders bring risks, since arena owners "have guaranteed the Islanders an unspecified annual payment to move them there, according to a report from Standard & Poor’s," a sum unidentified sources say "runs in the tens of millions of dollars a year" but which Yormark calls a “conservative” deal.

The value of delay 

Yormark, in a Last Look interview this week with City&State, talks about how "the transformation of our [Nets] brand has exceeded all our expectations. I think much of the credit, believe it or not, has to do with the delay in getting to Brooklyn. It enabled us to see the brand in Brooklyn, to create incredible amounts of anticipation. This is a borough that had been underserved in the area of sports entertainment since the Dodgers left in 1957. They were craving with their own home team... It gave us some traction.. .to be ready for the big moment."

The Nets, he said, launched in April 2012 "as a bit of a lifestyle brand... we wanted to give people a multitude of reasons to like us... with Brooklyn.. first home team... align to the world of entertainment." Now they're aiming to have an even better product on the floor.

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