Skip to main content

Overspending to make a splash: Barclays Center profits well below projections, which have been tweaked downward; will 15% cut do it?

How could it be, as Neil deMause put it in Field of Schemes, that Barclays Center barely breaking even despite #1 arena ranking? As Eliot Brown of the Wall Street Journal noted this week:
In its first full year in operation, the arena brought in about $30 million in operating profit, the company reported on Monday, far less than the more than $76 million projected when the arena began construction in 2010.
The fourth quarter was its strongest yet—with $10.8 million in operating profit—but still well below expectations.
Indeed, as the arena anniversary approached in September, a whole bunch of media outlets, including yours truly, took the tickets sales as evidence without analyzing costs. A month later, as Brown reported 10/18/13, Brooklyn Arena Is Glitzy, but Profits So Far Aren't Golden: Profitability of Barclays Center Raises Questions About Similar Projects in Other Cities:
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 [net] 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.
Adjusting goal of net operating income

Indeed, Gilmartin's figure deserves an adjustment. As Forest City Enterprises CFO Bob O'Brien told investment analysts this past Monday:
"This quarter we reduced the projected stabilized NOI [net operating income] for Barclays Center arena to $65 million, down from the $70 million included in our prior quarterly schedules. This represents a $2.7 million NOI reduction at our share. With one full year of operations now under our belt, and a better operation of the revenues and expenses, we felt it was appropriate to make this adjustments.”
According to an investor presentation released this past week:
c) Annual NOI for the Arena is expected to stabilize at approximately $65 million at full consolidation in the 2016 calendar year. Based on the partnership agreement, we expect to receive 55% of the NOI allocation until certain member loans are repaid. Therefore, we have included a stabilization adjustment to the Q3 2013 NOI to arrive at an annual stabilized NOI of $35.8 million. 

How much was projected?

According to the graphic below, from the arena bond offering, in the first year of operation--which is not the first calendar year, and included several months dark, the arena was supposed to earn $101.3 million and spend $24.6 million, with the figures rising in the next year to $104 million and $25.4 million-- a profit of well more than $70 million.



What are first-year numbers?

However, according to documents released this week, the revenue of $78.7 over nine months suggest a one-year total of  $104.9 million, while expenses over nine months of $57.1 million suggest a one-year total of $76.2 million, some three times the projected annual expenses.

However, according to Brown, those numbers can't be compared directly with the projections in the bond offering statement, because of different accounting procedures. However, even if expenses are overstated by 50%, they're still way off the mark.

Causes of expenses

As Brown wrote in October:
But attracting big acts can put pressure on margins. Music executives and analysts say that the Barclays Center's high expenses likely come in part from generous deals to woo big names, either by offering low rent or by guaranteeing a performer a high portion of ticket sales.

Forest City executives say the arena has been aggressive in cutting deals with big stars in some instances. They said high expenses also stemmed from over-staffing events and adding services like shuttle buses to nearby neighborhoods—services that are slated to be cut back or eliminated now that executives have a better sense of how to run the arena.

..."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."
It's not clear that a reduction in expenses of 15% will do the trick.

Nor will the arrival of the Islanders in 2015 (or sooner) necessarily be a boost, since 1) they may dislodge concert dates (as deMause points out) and 2) the arena (as Brown notes) has "guaranteed the Islanders an unspecified annual payment to move them there, according to a report from Standard & Poor's, which issued ratings on the arena bonds and highlighted the deal as a risk factor."

Future debt service

The amount owed on debt service will continue to rise, according to the bond offering statement.


Previous three-month NOI reports

Below are the previous three-month reports on net operating income.



Comments

Popular posts from this blog

Barclays Center/Levy Restaurants hit with suit charging discrimination on disability, race; supervisors said to use vicious slurs, pursue retaliation

The Daily News has an article today, Barclays Center hit with $5M suit claiming discrimination against disabled, while the New York Post headlined its article Barclays Center sued over taunting disabled employees.

While that's part of the lawsuit, more prominent are claims of racial discrimination and retaliation, with black employees claiming repeated abuse by white supervisors, preferential treatment toward Hispanic colleagues, and retaliation in response to complaints.

Two individual supervisors, for example, are charged with  referring to black employees as “black motherfucker,” “dumb black bitch,” “black monkey,” “piece of shit” and “nigger.”

Two have referred to an employee blind in one eye as “cyclops,” and “the one-eyed guy,” and an employee with a nose disorder as “the nose guy.”

There's been no official response yet though arena spokesman Barry Baum told the Daily News they, but take “allegations of this kind very seriously” and have "a zero tolerance policy for…

Behind the "empty railyards": 40 years of ATURA, Baruch's plan, and the city's diffidence

To supporters of Forest City Ratner's Atlantic Yards project, it's a long-awaited plan for long-overlooked land. "The Atlantic Yards area has been available for any developer in America for over 100 years,” declared Borough President Marty Markowitz at a 5/26/05 City Council hearing.

Charles Gargano, chairman of the Empire State Development Corporation, mused on 11/15/05 to WNYC's Brian Lehrer, “Isn’t it interesting that these railyards have sat for decades and decades and decades, and no one has done a thing about them.” Forest City Ratner spokesman Joe DePlasco, in a 12/19/04 New York Times article ("In a War of Words, One Has the Power to Wound") described the railyards as "an empty scar dividing the community."

But why exactly has the Metropolitan Transportation Authority’s Vanderbilt Yard never been developed? Do public officials have some responsibility?

At a hearing yesterday of the Brooklyn Borough Board Atlantic Yards Committee, Kate Suisma…

Forest City acknowledges unspecified delays in Pacific Park, cites $300 million "impairment" in project value; what about affordable housing pledge?

Updated Monday Nov. 7 am: Note follow-up coverage of stock price drop and investor conference call and pending questions.

Pacific Park Brooklyn is seriously delayed, Forest City Realty Trust said yesterday in a news release, which further acknowledged that the project has caused a $300 million impairment, or write-down of the asset, as the expected revenues no longer exceed the carrying cost.

The Cleveland-based developer, parent of Brooklyn-based Forest City Ratner, which is a 30% investor in Pacific Park along with 70% partner/overseer Greenland USA, blamed the "significant impairment" on an oversupply of market-rate apartments, the uncertain fate of the 421-a tax break, and a continued increase in construction costs.

While the delay essentially confirms the obvious, given that two major buildings have not launched despite plans to do so, it raises significant questions about the future of the project, including:
if market-rate construction is delayed, will the affordable h…

Revising official figures, new report reveals Nets averaged just 11,622 home fans last season, Islanders drew 11,200 (and have option to leave in 2018)

The Brooklyn Nets drew an average of only 11,622 fans per home game in their most recent (and lousy) season, more than 23% below the announced official attendance figure, and little more than 65% of the Barclays Center's capacity.

The New York Islanders also drew some 19.4% below announced attendance, or 11,200 fans per home game.

The surprising numbers were disclosed in a consultant's report attached to the Preliminary Official Statement for the refinancing of some $462 million in tax-exempt bonds for the Barclays Center (plus another $20 million in taxable bonds). The refinancing should lower costs to Mikhail Prokhorov, owner of the arena operating company, by and average of $3.4 million a year through 2044 in paying off arena construction.

According to official figures, the Brooklyn Nets attendance averaged 17,187 in the debut season, 2012-13, 17,251 in 2013-14, 17,037 in 2014-15, and 15,125 in the most recent season, 2015-16. For hoops, the arena holds 17,732.

But official…

So, Forest City has some property subject to the future Gowanus rezoning

Writing yesterday, MAP: Who Owns All the Property Along the Gowanus Canal, DNAinfo's Leslie Albrecht lays out the positioning of various real estate players along the Gowanus Canal, a Superfund site:
As the city considers whether to rezone Gowanus and, perhaps, morph the gritty low-rise industrial area into a hot new neighborhood of residential towers (albeit at a fraction of the height of Manhattan's supertall buildings), DNAinfo reviewed property records along the canal to find out who stands to benefit most from the changes.
Investors have poured at least $440 million into buying land on the polluted waterway and more than a third of the properties have changed hands in the past decade, according to an examination of records for the nearly 130 properties along the 1.8-mile canal. While the single largest landowner is developer Property Markets Group, other landowners include Kushner Companies, Alloy Development, Two Trees, and Forest City New York.

Forest City's plans unc…

At 550 Vanderbilt, big chunk of apartments pitched to Chinese buyers as "international units"

One key to sales at the 550 Vanderbilt condo is the connection to China, thanks to Shanghai-based developer Greenland Holdings.

It's the parent of Greenland USA, which as part of Greenland Forest City Partners owns 70% of Pacific Park (except 461 Dean and the arena).

And sales in China may help explain how the developer was able to claim early momentum.
"Since 550 Vanderbilt launched pre-sales in June [2015], more than 80 residences have gone into contract, representing over 30% of the building’s 278 total residences," the developer said in a 9/25/15 press release announcing the opening of a sales gallery in Brooklyn. "The strong response from the marketplace indicates the high level of demand for well-designed new luxury homes in Brooklyn..."

Maybe. Or maybe it just meant a decent initial pipeline to Chinese buyers.

As lawyer Jay Neveloff, who represents Forest City, told the Real Deal in 2015, a project involving a Chinese firm "creates a huge market for…