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.