2021 Arena Financials

[the artist FKA zipp]

After a short delay, the LAA posted their calendar year 2021 financials for the arena. I haven’t reported on their financials for a couple years since Covid made last year’s numbers difficult to analyze as far as performance.

Late in 2020, the LAA informed that Covid would significantly impair TIF revenue for 2021. The major financial impact actually occurred in 2020, but the TIF is paid to the LAA in the year following the tax relevant activity. So 2021 financials show a significant decline in TIF revenue from 2020.

I’ll first present arena revenue information followed by a forward-looking analysis of the LAA’s cash position and debt service. Future requirements from the 2017-2018 bond refinancing are spelled out in a schedule of payments much like you have with a mortgage amortization schedule. There isn’t any guesswork or estimation involved. So let’s proceed…

The majority of arena revenues in 2021 are NOT from true operating sources, “operating” in the sense of controllable or fluctuating. I used to and still occasionally refer to the place as “Bailout Arena” for this very reason. The arena was never self supporting even when it first opened its doors in late 2010. The City through its “Metro Guarantee” now contributes almost $11 million annually to arena operations. As we all recall since it happened more recently, the arena negotiated--extorted--$2.4 million annually from U of L starting in 2018 which the LAA accountants call the “U of L Guarantee.” And the TIF, of course, has been a significant and increasing revenue source until 2021’s Covid hiccup. Here’s a graph showing these three non-operating revenue streams since the arena started operations:

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It’s TBD whether 2021 will in fact be a “hiccup” in the TIF revenue stream. For a decade it has been the one revenue source that has shown a regular increase although the pace of increase has slowed recently. Between 2017 and 2020, it has increased about $700 thousand annually, which as we will see shortly, pales alongside of upcoming debt service commitments.

To get what I regard as a true picture of operating revenues, these non-operating revenue streams should be subtracted off of the “Revenues and Support” values reported by LAA accountants on the income statement. Over the same time period, here are those results:

One plot shows the values in millions of dollars of operating revenue, the other, showing the % of total revenues represented by the operating revenue values. Each with their own scale/axis, they show comparable results--that actual arena operations now contribute the smallest amount of revenue in arena history. Operating revenue from staging U of L events, concerts, and shows along with advertising and naming agreements has declined by 75% from $16 million in 2010 to around $4 million today. Consider that alongside of total LAA expenses in 2021 of around $32 million.

 

[the artist FKA zipp]

While revenue from arena operations has declined to the extent described above, the LAA has had to work to meet its expenses. The TIF has increased significantly and was recalculated at one time to maximize it (adding/removing City property). The Metro Guarantee has maxed out, and they were able to squeeze more money out of U of L, a political process that eventually cost an AD his job several years ago.

And at that time, $350 million of arena bonds were refinanced as interest rates declined making possible the delay of principal payments and a large increase in the amount borrowed. The part of that sentence after “interest rates declined” was mostly lost on the general public who were fed a narrative about how much more secure financially the new bonding plan was going to make the arena. Unfortunately, as with most good news-bad news situations, you eventually have to deal with the bad news side of things.

Before this past year and dating back to 2016, there has been no payoff of principal on arena bonds. And interest payments decreased significantly—around $5 million annually—after the original bonds were refinanced. So for the better part of the last five years, the LAA has been the beneficiary of a sizable reduction in what had been its arena debt service. At the same time, it INCREASED the bonds outstanding or amount borrowed by almost $40 million (a large portion of which was paid to the bond underwriters and brokers). I doubt many local taxpayers know that the LAA currently carries ten percent more debt on the arena than the day it opened for business, while during the same time period, the book value of the arena property has declined by $100 million. Back to the 2021 financials…

The following graph indicates a potential liquidity problem in the near future as bond principal payments start increasing in earnest:

The bars on this graph show the amount of net principal paid by LAA on the original and new bonds. “Net” in this case is a running total of the “Cash for Financing Activities” items on the LAA statements of cash flow. Here’s the list of those items for each year the arena has operated:

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Running total is simply a sum of the values in each year shown and the prior years. The running total is the net amount the LAA has paid to retire bonds. Through 2021, the LAA has actually RECEIVED $4.8 million dollars more in principal than it has paid in, largely owing to large sums received in 2010 and 2017.

However, the last item in the middle column ($3.7 million) portends a big change coming, the onset of large, annual principal payments toward the new bonds. The negative red bars on the previous graph shows the relative amount of that principal compared to the cash on hand, the solid black line. A decade in which the LAA has received a pass on making principal payments has now left them with a $4.8 million cash balance that's about the same as this year's principal payment of $4.2 million. And there are $370 million of bonds—along with annual interest—still outstanding.

Over the next five years, there’s about $26 million in bond principal due. With the new bonds, annual payments will continue an additional five years or until 2047. The prospect of heavy financing costs led the LAA to refinance five years ago. I don’t think that opportunity will present itself again for another bailout…

 

[Villecard502]

oh well