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Is Barclays Center dumping the Islanders, or are they renegotiating? Evidence varies (bond doc, cash receipts); NHL attendance biggest variable

The Internet has been abuzz since Bloomberg's Scott Soshnick reported 1/30/17, using an overly conclusory headline, that Brooklyn’s Barclays Center Is Dumping the Islanders.

That would end an unusual arrangement in which the arena agrees to pay the team a fixed sum (minus certain expenses), in exchange for keeping tickets, suite, and sponsorship revenue.

The arena would earn more without the hockey team, according to Bloomberg, which cited “a financial projection shared with potential investors showed the Islanders won’t contribute any revenue after the 2018-19 season--a clear signal that the team won’t play there, the people said."

That "signal," however, is hardly definitive, as are the media leaks about a prospective new arena in Queens, as shown in the screenshot below from Newsday. Both sides are surely pushing for advantage, if not bluffing.

Consider: the arena and the Islanders can't even formally begin their opt-out talks until after this season. The discussion period expires next January 1.

Barclays can terminate the agreement by the end of the 2018-2019 season, while the Islanders can do so by the end of the 2017-2018 NHL season.

Newsday 2/25/17 cover
As well-sourced Newsday hockey writer Arthur Staple tweeted after the Bloomberg story, “Doesn't appear that there's any plan for Barclays to send the #Isles packing. Will they talk? Sure. But far from decided.” (Note that, according to the Bloomberg article URL, the original headline more cautiously suggested Barclays "is said" to be dumping the Islanders.)

Summer 2016: Islanders helped Barclays

Is Barclays bluffing? Maybe, maybe not. Based on (not previously reported) information that surfaced last summer, in which potential buyers of refinanced arena bonds were told the Islanders helped the arena financially, I would have said it's a bluff.

In fact, a financial projection in bond documents suggested Barclays would do OK even if Islanders’ attendance remained steady, meaning not robust.

And, in contrast with Bloomberg’s report that the arena “would make more money from concerts, other events,” last summer’s projections were inconclusive; the documents suggested it wouldn’t be simple to find substitute shows.

More recent signs of a push

Since then, more information has emerged, which suggests Barclays, operated by Mikhail Prokhorov's Brooklyn Sports & Entertainment (BSE) may be more serious.

First, we've learned that the Nassau Coliseum, about to open in April and operated by BSE, does not have a minor league hockey team, as promised, and is now aiming to have the Islanders return, albeit to a downsized space.

Second, we've learned that the arena paid the Islanders far less than the much-reported $53.5 million pledge, which may suggest a less happy deal for both. (The two numbers circulating--$47 million and $37.5 million--were reported at different junctures to arena bond investors, and Newsday reported the latter figure 1/30/17.)

Third, recently released financial data indicate that Barclays' cash receipts in the second half of calendar year 2016 are down $8.6 million (about 7.4%) compared to the previous year. That figure deserves a huge asterisk--the role of the Islanders isn't isolated, two Kanye West concerts were canceled, and cash does not indicate profit--but it can't be great news.

So the numbers—at least the ones made public—are inconclusive, and all parties are surely pushing for advantage. (Also note that transparency is not exactly a hallmark of arena management.)

If Barclays does seek to evict the Islanders, maybe operators don't expect make more money in Brooklyn. Maybe they calculate the potential loss in Brooklyn would be less than the loss in Nassau without an anchor tenant. But we just don't know yet.

Variables and contradictory evidence

Among the variables at issue:
  • the ability of Barclays Center operators to increase revenue from hockey
  • the ability of arena operators to fill hockey dates with concerts and other events
  • the desire of arena operators to get an anchor tenant for the Nassau Coliseum
  • the alternatives that Islanders owners have, including a new arena in New York or a move out of this market
  • the contours of the annual financial deal between Barclays and the Islanders
  • the contours of the rest of that Barclays-Islanders relationship, including the ice situation
In other words, it may make sense for the parties to renegotiate the deal. Or, perhaps, some issues aren't fixable or negotiable.

In this article, I add some details that cut both ways, including under-reported or never-reported statements from Barclays.

Keep in mind another variable: both arena and team win if the Islanders make the playoffs. The arena gets additional marketing revenue and concession revenue, while the Islanders get tickets/suites revenue, as well as playoff-specific advertising.

On the other hand, a precarious situation for the Islanders may make it tougher to retain/sign players, which then makes the playoffs less likely.

Shifting perspective on value of hockey

Atlantic Yards, I've said, is a "never say never" project, and so too is the Islanders deal with the Barclays Center.

Upon the deal announcement in October 2012 by then-Islanders owner Charles Wang, the 25-year lease was said to be "ironclad," with no mention of the opt-out clause. That wasn't so.

Before the first Islanders' season in Brooklyn, in February 2015, Barclays Center CEO Brett Yormark said that adding 44-plus events to the schedule represented an “insurance policy," so the arena wouldn't have to rely on the cyclical concert business.

A month later, he spoke similarly, according to the Record. "Before the Islanders came in, it was all about volume” in filling dates, Yormark said, indicating that arena operators could now "become a little bit more selective."

Now, after less than two seasons, they've decided they don't need that insurance policy?

2016 revenues rise

As stated in a market study included in the bond document, the second anchor tenant added "incremental suite, sponsorship and concession income," and the arena "was successful in increasing attendance throughout the 2015-2016 season."

Adding the Islanders, the study said, "has been beneficial for the arena" (even though, as I've reported, attendance was not only lower than announced, it may have been even lower.) See screenshot below.


Of the 50% of arena sponsors expanded their commitments, according to the study,  75% of them also extended their sponsorship elements to include the Islanders. The presence of the Islanders let Barclays “leverage itself as a two-tenant building for future sponsorship revenue,” the study said.

In the first year with the Islanders, net operating income--profit, before paying off hefty financing--increased by 20 percent, from a rather anemic $38 million to $45.6 million.


Then again, the 2016 net income was slightly below the figure two years earlier.

Also note that $45.6 million does not equal the once-predicted $55 million--which was reduced from $65 million and previously $70 million. Remember, Barclays operators do not keep that full $45.6 million but use a significant chunk to pay off construction. (More on that in another article.)

The arena's income increase in 2015-16 also may be credited to an increase in the number of concerts, from 36 to 47, which are more profitable than family shows, which decreased from 59 to 31.

The arena earned less than $100,000 per Islanders game, or less than $5 million, given 49 home games, including 5 playoff games. That compares with between $6.9 million and $9.7 million from the Nets over the years. (Those numbers, as far as I can tell, involve tickets and concessions, not sponsorships and suites.)


Variable attendance and arena wild-cards

What if the Islanders leave?

"Early termination of the NYI License Agreement coupled with an inability of the Arena to generate supplemental revenue through live entertainment alternatives on a portion of the dates that would have been Islanders Home Games, would have an negative impact," the study by Convention, Sports & Leisure (CSL) said, which also noted that competition in the area could "from time to time" detract from the ability to book certain events.

Still the study said NHL attendance was as the biggest variable affecting future arena cash flow. Perhaps the purported 2018-2019 doomsday date extrapolates from the Islanders’ current performance, rather than a playoff-bound team.

Below shows how an increase or decrease in Islanders attendance can affect cash flow--though even a worst-case scenario of a $4 million decline still leaves the arena profitable, thanks to a refinancing of construction debt.


But what if it gets worse?

CSL ran simulations showing that, in 90% of the cases, the arena would generate approximately 8-9% less than management projections, at worst, leaving a decent cushion for debt service, a coverage ratio of 1.75--or 175% of what was needed.



But CSL also considered that estimate too conservative, and wanted to give greater weight to  a steady-state performance by the Islanders, rather than a worst-case scenario.

The study said:
When looking at Islanders attendance specifically, it could be argued that the range of possible outcomes for Islanders attendance used in the simulation (9,000 to 12,000) is conservative given the attendance of the Islanders in the first year at the Barclays Center (approximately 10,200 paid attendees on average), the team's loyal following in the metro area and the general attendance patterns throughout the NHL. As a result, CSL ran a simulation in which it is assumed that projected hockey attendance stays consistent with its first year average at the Barclays Center (i.e. no variability in hockey attendance."
That chart is below, and it indicates that in 90% of the simulations run by consultant CSL, the arena generated only 4-5% below management projections.


But what if CSL should have dwelled on the possibility not of a steady Islanders performance but a worse one?

Current announced attendance lags last year's figures, but attendance did pick up in the second half of the season. Note that, as I wrote, last year's announced attendance of 13,900 was actually 11,200--or, perhaps, 10,200 paid.(As Neil deMause points out, CSL does not exactly have a foolproof track record.)

The flaws at Barclays

Barclays, built for basketball, has an off-center scoreboard and many obstructed-view seats, plus a location that makes it tough for some Long Islanders to attend games. So it’s neither drawn the full complement of longtime fans nor firmed up a new fan base.

The at least 1,500 obscured-view seats (perhaps many more) are a problem, but may not be the biggest one.  The arena uses PVC pipes, not metal ones, to make the ice, which means players sometimes find the ice choppy and unplayable, especially in warmer weather. (Then again, note this report saying that ice elsewhere in the league may be worse.)

“The owners are committed to the franchise, they’re committed to New York and the great fan base that has followed the Islanders,” NHL Commissioner Gary Bettman said, according to a 1/29/17 New York Post report. “There are some issues about playing at Barclays, it may be fundamental to the ice system. That’s not something that can be fixed in the short term. I think, as is prudent, Scott Malkin and Jon Ledecky are reviewing the situation and looking very seriously at what their options are.”

But their options aren't great. 

If the team stays in Brooklyn, a renegotiation could involve money, as well as more consideration to Islanders' preferences in scheduling. (The Nets get first dibs.) But upgrading the ice system, according to previous reports, would require closing the building for a summer.

Where next? 


What next? Newsday reported:
Barclays officials are encouraging an Islanders to return to Nassau, in part, to prevent construction of an arena that would be in direct competition for shows and concerts with the renovated Coliseum, sources said.
Really? I had my doubts, but the plot has thickened. Bloomberg's Soshnick reported 2/24/17, in NY Rangers Owner Dolan Backs New Home for Islanders:
A supergroup of New York sports executives, including owners of the New York Rangers and the New York Mets, is lining up to invest in a new arena just outside of Queens for the National Hockey League’s Islanders, according to people familiar with the discussions.
And then Newsday followed up. Sure, there's a logic for the owners of Madison Square Garden to push for an arena that would compete with the Barclays Center and Nassau Coliseum.

Still, those reports are hardly conclusive, because a new arena would likely require significant public assistance to get off the ground, and may not have enough cash flow to pay off construction. After all, the Barclays Center, in the midst of a much more affluent area and with better transit, is doing far worse than projected.

So I still suspect that, if  Barclays officials are encouraging a return to Nassau, it's less about Barclays than the need to fill the Nassau schedule.

The Islanders, unless they magically get that new arena built, have great local options beyond Barclays. They needed a local arena, as the Nassau Coliseum decayed, because team owners didn't want to lose their sweet local cable TV deal--averaging $27 million a year, Forbes reported in 2013.

They could move, as existing arenas beckon in Kansas City, Quebec City, or even Hartford. But that would mean a very different TV contract.

Back to Nassau?

Last year, team owners reportedly ruled out a return to the Nassau Coliseum, which is being renovated and downsized to 13,000 seats, and lacks luxury suites. We recently learned that, not only would that venue not have a minor league team, as originally promised by developer Bruce Ratner, the county won’t enforce that part of the contract. County officials want the Islanders.

But would Islanders owners, who paid a reported $485 million for a team with Brooklyn buzz, accept an arena with only 13,000 seats and relatively few luxury suites? (Forbes, by the way, last November valued the team at only $385 million, saying the team in its first Brooklyn season earned a profit of $2.7 million after a decade of steady losses.)

Well, things could change. Newsday reported 2/2/17 that the Long Island Association, a leading business group, has asked Empire State Development--the state economic development authority that also shepherds/oversees the Barclays Center-- to consider funding new bus transit to the Coliseum from Long Island Rail Road stations, or to help fund an arena expansion by 2,000 seats.

Both would be public help to boost private coffers--and, indirectly, county ones.

If so, that would set up more than a few ironies. First, the Islanders moved to an arena not built for hockey. Then, after Ratner promised the renovation would be entirely privately funded, public funding would subsidize the Islanders’ return to a downsized arena.

One fan commenter, noting the connection between the SHoP-designed exteriors of both arenas, wrote, "going back to the NVMC, now renovated to look like Barclays afterbirth, would be such a bizarrely appropriate conclusion to this story."

Different shadings of risk from the ratings agencies

Assessing the refinanced bonds for the Barclays Center last August, Moody's opined:
The addition of the New York Islanders (Islanders) under a 25-year license agreement, starting with the most recent season (2015-16), provides greater revenue certainty with the addition of 44 known hockey sporting dates to the calendar in any given year, which Moody's considers to be a credit positive.
Regarding the arrangements with the Islanders, we understand that the terms of a side letter among the parties allow either the Arena or the Islanders to opt out of the license agreement after the 2018-19 season if modifications to the terms of the agreement are not agreed to. In addition, the Islanders have an early termination clause after the 2017-18 season. While Moody's believes such a termination and subsequent relocation of the Islanders would put downward pressure on the Arena's financial profile and rating, we consider such an event to be unlikely at this time given the timing constraints to find an alternative venue, the Islanders history in the New York metropolitan area and their large loyal fan base.
(Emphases added)

S&P more cautiously observed:
Our 'BBB-' rating reflects mostly stabilized events and basketball revenue, but continued uncertainty regarding the ramp-up for the Islanders after their first season at the arena, and the potential risk associated with Islanders relocation or contract modification within the next several years.
How well are suites selling for hockey?

In the second year of the Islanders season, it may be that luxury suite sales are an area of concern.

At one point, the Official Statement notes that Nets luxury suites "are currently licensed at an initial average annual license fee of approximately $300,000," while "Islanders suites are licensed... at prices ranging from $60,000 to $180,000."

Note the absence of an average for the latter, and a seeming significant discrepancy.

But the market study provides different information, in which Islanders suites indeed are licensed in a range from $60,000 to $180,000, while Nets suites range from $95,000 to $210,000.


Before the first season, in an 11/17/15 Newsday article on the Islanders' move, Yormark said, in the newspaper's paraphrase, that "private suite sales are ahead of budget projections and sponsorships are on target."

After the first season, the market study in the Official Statement said that the Islanders accounted for 20 percent of premium seat revenue--which includes not just suites and loge boxes.


Lower demand for suites and cheaper tickets?

Some anecdotal evidence suggests things have gotten worse.

In a comment 12/19/16 at NY IslesTalk, Moderator "gazaroog" wrote that he contacted an insurance company with whom he has a business relationship about their corporate suite tickets, given that he wanted to see former Islander Kyle Okposo play on a Friday night:
I asked my guy at the insurance company if he had an corporate tickets available for the game. He pretty much laughed and said "no problem". He then instantly sent me electronically 10 tickets, which is the entire suite electronically to me. I got back in touch with him saying there must have been a mistake. He said "nope, they are all yours George". Apparently they can't give these tickets away and their biggest demand for seats are all of the concerts they hold and some of the Net games.
So while after all the years we discussed the idea of "corporate suites", being the big money maker potentially for the Islanders and the sponsorships that go along with it, it's just not working out as people may have thought.
He did add that he still thought Barclays was the team's only option.

Others say the arena has lowered ticket prices for the Islanders. A commenter on another message board, HFBoards, wrote 1/31/17:
You had to suspect the Islanders at Barclays was in trouble when Barclays, who handles the ticket operations, lowered renewing season subscriber prices across the board, some areas as much as 40% for next season.
They lost season subscribers or had them downgrade from full season to partial, coming off a successful season last year. Barclays must have feared losing even more STHs [season ticket holders] for next year without taking this drastic action.
Similarly, a commenter on Lighthouse Hockey wrote 1/30/17:
I’m a season ticket holder and the ticket prices were way over priced for the season. Can’t sell a game for 30 with a face value of 79. Next year they slashed prices in half knowing that everyone was just buyin on stubhub and season ticket resales for cheap on gameday. 
Cash receipts indicate decline; Islanders a factor?

The bond document said that the arena's increase in both sponsor and suite revenue was due to the addition of Islanders activity, which was approximately $13.5 million for sponsors and suites.

As noted above, however, cash receipts for the second half of 2016 are down more than 7% compared to the previous year. I've reproduced the quarterly screenshots below.

The Barclays Center's recently released 2016 fourth quarter cash receipts indicate a $10.6 million decline in suite and sponsor payments compared to the 2015 fourth quarter million. However, third-quarter 2016 suite and sponsor payments were up by about $6.8 million. Together, that nearly a $4 million drop over six months.

Ticket sales over that same six-month period indicate a $4.6 million decline.

The unresolved question is how much the Islanders are a factor, given the poorly-performing Nets and those lost New Year's Eve concerts. Nor do we know enough about how those installments are paid. But the cash decline has to concern the arena operators as they plan future financial negotiations, including with the Islanders.
2015 Fourth Quarter cash receipts

2016 Fourth Quarter cash receipts

A better third quarter


That said, the third quarter performance between 2015 and 2016 was slightly better for 2016, given a bump of nearly $7 million in suite and sponsor installments and a decline of some $5.5 million in ticket sales.

It could be that, yes, the Islanders are responsible for some increased suite and sponsor payments.

It's tough, though, to know how much the Nets or the Islanders are responsible for the decline in third-quarter ticket sales without knowing what percentage of tickets are bought pre-season and without comparing the number of big concerts during that quarter each year.

So we can't say much definitively except that fourth-quarter receipts are down, because of lower suite and sponsor installments. And that should make arena operators antsy.
2015 Third Quarter cash receipts
2016 Third Quarter cash receipts

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