Barclays Center operating company in FY 2023 again reports loss. Operating income slighly above FY 2022. Owner Tsai kicked in $18M, less than previous years.

After eleven years, the Barclays Center is still losing money, rather than delivering the profits envisioned--though the amount of losses is exaggerated for tax purposes. And billionaire Joe Tsai is still kicking in capital to bolster arena finances, though less than in previous years.

The arena's FY 2023 results, released to bondholders last week 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.

The arena company in Fiscal Year 2023, which ended June 30, reported $16.1 million in net operating income (NOI)--revenue over expenses--but had to pay $21.1 million in interest, leading to a loss of $5.1 million--as I've re-interpreted the calculations.

This was a slight improvement over FY 2022, when the arena company had $14.1 million in NOI, $21.6 million in interest, and a loss of $7.5 million. And that was an improvement over FY 2021, when the pandemic severely stalled events and revenues, with a net operating loss of $23 million.

Way behind expectations

But the arena still hasn't recovered, perhaps because the switch from SeatGeek to with Ticketmaster, expected to schedule more concerts, hasn't fully kicked in. Also, the Brooklyn Nets, which could fill the arena in a long playoff run, have not gotten past two home playoff games in the past two seasons, as noted by Forbes.

Keep in mind that in a "normal" year--though the goal has never been met--the arena is supposed to have sufficient net income to not just pay off the bonds, but deliver tens of millions of dollars in profits, at least before the expenses used to calculate tax write-offs.

Contribution from owner

And that means billionaire Tsai put up $18 million to bolster the arena's finances, as shown in the screenshot below.

That's less than the $38 million he contributed in FY 2022 and the $52 million he contributed in the previous fiscal year, but it's hardly chump change. 

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

So 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 Tsai--to soar.

How big a loss?

As noted in my previous coverage, keep in mind that the fiscal reports present the arena awash in red ink: a net loss of $76 million, vs. $78 million the previous year.

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 indicates $19.9 million in depreciation, and $51 million in amortization. So that's nearly $71 million in paper losses, which brought the FY 2023 loss to $76 million.

That surely helps for tax purposes, and the Forbes headline was Barclays Center Posts Loss Of $76 Million For 2023.

I don't consider that framing the most important one, because I'm comparing the arena performance to the way it was presented to potential bond buyers, who were not to factor in depreciation and amortization.

Rather, they were told that net operating income would be nearly triple the required bond payments, not less than them. The NOI estimates were downgraded from $70 million to $55 million, but never met. As noted, NOI in FY 2023 was just $16.1 million.

Member's Equity declines

As noted by Forbes, Member's Equity--as owned by the limited liability company (LLC) controlled by Tsai--has steadily declined, to $138.2 million, as seen in the screenshot above. That is because paper losses keep increasing the net loss, and the capital contribution barely makes up for it.

As of FY 2020, Member's Equity was $329 million. So the trend is pointing ot a negative number.

Note that Member's Equity has a number of definitions, and I'm not sure how it's being defined here, and whether a negative turn would be meaningful. After all, the arena props up the value of the Nets.

"Risks and Uncertainties"

A section on "Risks and Uncertainties" in this year's report no longer cites the continued impact of COVID-19 on the live event business, but--as in the FY 2022 report--cites other economic conditions "such as inflation and supply chain issues... resulting in higher operating costs for various services, in particular, electric, gas, water and other general supplies and repairs and maintenance."

However, given that billionaire Tsai still backstops the arena, the business is not in danger.

Concessions dip

In FY 2023, the arena reported $10 million in revenue from Concessions--slightly below $10.3 million in pre-pandemic FY 2019 and somewwhat below $11.5 million in FY 2022.

So there's room for improvement.

Accounts receivable

The report says that Accounts receivable (i.e., billed but not yet paid) total $7.4 million, less an allowance for doubtful accounts of $918,431.

In the past year, the arena company had has three customers, Nike, Inc., Pepsi Cola Company and Opal Holdings (a real estate investment firm)-- that represent 44% of gross trade receivables.

Deferred revenue

The arena company had a significant increase in deferred revenue, which represents customer payments received for sponsorship, suite license, and future events that will be recognized as revenue when performance obligations are satisfied--within the next year.

For FY 2023, the arena company had a deferred revenue balance of $46.5 million, compared to $28.8 million in the previous year..

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 $38.5 million in PILOT payments in FY 2023, that included $4.9 million in principal repayment and $22 million in interest (this according to the annual report's text, not the chart excerpted above, which cites $21.1 million).

The remainder goes to some $11.6 million in O&M funds, which can be used by the arena operating company to reduce any costs that were previously out of pocket, but otherwise simply go back to the company.

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.)

Impact of rising PILOTs.

The PILOTs will rise some $800,000 a year over the next two years. 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 arena naming rights agreement to replace the current below-market one with Barclays, which expires in 2032? I wouldn't rule it out.

But perhaps by then the arena operator will fill the building with more events.