Barclays Center operating company still in the red for FY 2022, though 2021 was far worse. Got $38M boost from owner Tsai. Inflation new factor, beyond COVID.

After ten years--the anniversary was Sept. 28--the Barclays Center is still losing money, much less delivering the profits envisioned. Part of that is surely due to the pandemic, and now economic forces like inflation. Part is due to over-optimistic expectations from the start.

And from one perspective, the arena is part of a financial success, since the availability of a Brooklyn venue, in the world's media capital, has allowed the value of the Brooklyn Nets--long owned by the operator of the arena company, which since 2019 has been Joe Tsai--to soar.

While the Barclays Center's financial performance improved over FY 2021, when the pandemic severely stalled events and revenues, the arena is still ultimately in the red.

The arena's FY 2022 results, released to bondholders yesterday afternoon--a late Friday news dump?--by operator Brooklyn Events Center, indicate that the revenues, while at least exceeding expenses, were still not enough to pay off construction bonds, much less deliver a profit.

And that means billionaire Tsai put up $38 million to bolster arena's finances. (See screenshot below.)

That's less than the $52 million he contributed in the previous fiscal year, but it's hardly chump change. The fiscal year ends June 30.

NOI improved, but not enough

With revenues of $98.5 million and operating expenses of $84.4 million, the arena's net operating income (NOI) was finally back in the black, at $14.1 million. In FY 2021, it suffered a net operating loss of $23 million--with $35.9 million in revenue dwarfed by $58.9 million in expenses, so this is a swing back of more than $37 million.

Still, that $14.1 million isn't profit. It's supposed to cover $37.65 million in payments in lieu of taxes (PILOTs), which notably include $21.6 million in interest on the bonds. (See more on PILOTs below.)

Keep in mind that in a "normal" year--though the goal hasn't been met--the arena is supposed to have sufficient NOI to not just pay off the bonds, but deliver tens of millions of dollars in profits.

Missed opportunities?

I wrote last year that the need for payments from Tsai presumably would decline--and the possibility of profits would re-emerges--as the arena returned to a more regular schedule and reaped the benefits of a top-flight Nets team, higher ticket prices, better attendance, and new sponsorships.

But the schedule only partially recovered, with some touring acts still waiting to return to the road, and some canceling or postponing performances. Also unmentioned in the annual report: the Nets were swept in a first-round playoff series by the Boston Celtics, and thus the arena could not profit from an extended playoff run. That might have made a big difference.

As I wrote last year, don't worry about Tsai, though: he still gets to save big on taxes, given even larger paper losses, and the value of the team+arena keeps rising.

Beyond COVID-19, economic pressures

A section on "Risks and Uncertainties" in this year's report not only noted the continued impact of COVID-19 on the live event business, but also cited other economic conditions "such as inflation and supply chain issues are impacting the business resulting in higher operating costs for various services, in particular, electric, gas, water and other general supplies and repairs and maintenance."

Meanwhile, billionaire Tsai still backstops the arena, so the business is not in danger. This passage was repeated from the 2021 report:

Management has evaluated the significance of the financial impact of these conditions and has concluded that the Company will be able to satisfy its future liquidity needs, based primarily on the fact that a parent company with sufficient liquidity has committed to make any and all capital contributions to the Company as needed for a period greater than one year from the date of issuance of these financial statements, including those required for the Company to comply with the Company's Operating Support Agreement with the NBA and certain of the Company’s affiliates and to satisfy all of the Company's financial obligations as they become due.

Past comparisons?

How is the arena doing, compared to past years? Well, the past two fiscal years, given the pandemic, are not apt comparisons. The last pre-pandemic season, FY 2019, offers an inexact comparison.

In that year, the arena had total revenue of $142.1 million and operating expenses of $143.6 million--a loss in NOI, before bond payments. The expenses were inflated by an onerous deal with the then-tenant New York Islanders, which required $55.9 million in payments. 

Assuming that the revenues and payments were a wash--likely not--that suggests non-Islanders revenue was $86.2 million. Now it's $98.5 million. But surely arena managers hoped for more; the departure of the Islanders was supposed to open up the schedule for more lucrative concerts.

In the last pre-Islanders season, FY 2015, arena revenues were $112.9 million and expenses were $74.9 million, delivering a NOI of $38 million, which seems far more impressive, though--as I argued (and was disputed, because it's complicated)--the arena still lost money, given its debts. Either way, it wasn't delivering the expected profits.

Deep red ink

As noted in my 2021 and 2020 coverage, keep in mind that the fiscal reports present the arena awash in red ink, even if net operating income is in the black. 

That's thanks to calculations of depreciation (how much of a tangible asset's value has been used up) and amortization (similar to depreciation, but for intangible assets like Goodwill), thus ensuring accounting losses and tax benefits.

The report again indicates $19.7 million in depreciation, and $50.8 million in amortization. So more than $70 million in paper losses took the official FY 2022 loss to nearly $78 million.

Concessions back

While typically the arena reports Concessions as revenue--$10.3 million in FY 2019 and $8 million in FY 2020--in FY 2021 it was reported, anomalously, as a $4.5 million expense.

This past year, Concessions represented $11.5 million in revenue. As noted in the report, "Concession revenue is the Company’s share of gross receipts in accordance with contractual arrangements with its concession operator."

If the arena could reap more revenue from Concessions in the past year than in FY 2019, when total revenues were $142 million, does that indicate an improvement? Maybe, maybe not--after all, the total included that Islanders deal, so non-Islanders revenue was less than total revenue in FY 2022.

Below-market contracts: arena naming rights?

The FY 2022 report repeats text from the previous one:

As part of the valuation of assets acquired and liabilities assumed in connection with the Acquisition [of the arena company], the Company determined that certain of its contracts are considered below market.

The contracts are not cited, but the document states: 

Amortization for these contracts is computed on a straight line basis, approximating the impact of these below market contracts over their remaining useful lives, which the Company has determined to be 13 years.

I wrote last year that that seems to be the naming rights contract with Barclays, but if so, they were sloppy, since the previous year’s financial report similarly said 13 years. So that's two years in which they repeated the same language. The naming rights contract has only ten years to go. 

(If I'm wrong, I trust someone at the arena company will tell me, and I'll update/correct this. As noted below, the estimate also applies to suites. But the 13-year figure should have been adjusted each year. So if I'm mainly right, does that mean I'm the only person reading this? Bondholders and potential bond buyers are supposed to rely on this document.)

The liability was again assessed at $21.4 million--which seems low, if it's the naming rights contract. The accumulated  amortization was $4.6 million.

The document states:

The amortization associated with the Company’s other liabilities is recorded on the Company’s statement of operations within sponsorship and suites revenues, since the related contracts giving rise to the liability are sponsorship and suite contracts.

But it's doubtful that other contracts last as long as the naming rights agreement since, as stated elsewhere in the document, the terms of sponsorship agreements "typically range from one to seven years" (though that leaves room for an outlier like Barclays) and suite license agreements "are for various terms ranging from one to seven years."

Accounts receivable

The report says that Accounts receivable (i.e., billed but not yet paid) total $10.1 million, and that SeatGeek and First Data Corporation--a ticketing and financial processing company--represent 50% of gross trade receivables.

But "no allowance for doubtful accounts has been recorded," indicating they expect to be paid.

Credit risks

The arena reported that Barclays Services Corporation (“Barclays”) represents 10% of net revenues, respectively.

Well, if net revenues were $98.5 million, 10% does approximate the $10 million annual Barclays deal.

More on PILOTs

The payments in lieu of taxes (PILOTs) provide a minimum of 110% coverage of the estimated net debt service requirements of the tax-exempt bonds that pay off construction.

Nominal state ownership of the arena allows for tax-exempt bonds, which significantly lowers the cost of financing, saving the arena operators--companies controlled by Bruce Ratner, Mikhail Prokhorov, and now Tsai--hundreds of millions of dollars over time.

Those PILOTs are composed of three components: principal repayment, interest expense, and operations & maintenance (O&M) Funds.

In other words, while the arena company made $37.65 million in PILOT payments in FY 2022, that included $4 million in principal repayment and $22.1 million in interest (this according to the annual report's text, not the chart excerpted above, which cites $21.6 million).

The remainder goes to some $11.5 million in O&M funds, which are used by the arena operating company to reduce any costs that were previously out of pocket. A refinancing in 2016, which significantly lowered interest rates--but could not lower the PILOTs--thus left more money for O&M. 

Estimated savings: $90 million over time, on top of the $122 million federal subsidy previously calculated before the refinancing. (The latter figure, compounded with a tax break to bondholders, costs the public $161 million, according to the Brookings Institution.)

Could rising PILOTs mean revised naming rights?

The PILOTs for FY 2023 will be $38.5 million and rise some $800,000 a year. However, as of FY 2026, the interest payment component of PILOTs will rise significantly, by about $5.5 million. That puts pressure on the arena operator to increase revenues. 

Might that mean a new naming rights agreement to replace the current below-market one? I wouldn't rule it out.