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ENTREPRENEURS SEE PROMISE IN OLD THEATERS

By Donna Mitchell

Art films and live jazz, too.

Most saw the collapse of America’s major cinema chains that followed a suicidal frenzy of overbuilding for what it was: a big mess. But to a brave few, it has also represented an opportunity.

A handful of entrepreneurs are putting closed movie theaters back into action, and one company is even opening new ones. All of them are intent on doing things differently from the big chain operators, whose overbuilding of multiplex and megaplex cinemas in the 1990s caused a spate of bankruptcies in 2000. Their efforts are paying off.

“Overall, the movie theater industry is definitely more positive,” said John Maxwell, an analyst for BNP Paribas in New York City. “I wouldn’t say it is in great shape, but it’s moving in the right direction.”

Industry veterans Keith Thompson and Phil Zacheretti, both former executives at Regal Cinemas (the company emerged from Chapter 11 bankruptcy protection in January) have started a new company to own, lease and manage movie theaters in underserved markets — yes, there are still some of those, executives say — aptly naming their Knoxville, Tenn., company Phoenix Theatres. Formed in January, the team had reopened three cinemas by the end of February and has its eyes on more properties, with a focus on smaller cinemas of eight or nine screens.

Besides catering to the moviegoing public, the partners are saviors to shopping center landlords whose properties have lost, or are losing, theater tenants.

The eight-screen cinema, located inside the Columbia (S.C.) Mall, owned by CBL & Associates, Chattanooga, Tenn., had stood empty for a year before Phoenix leased and reopened it on Nov. 16 — the opening day of “Harry Potter and the Sorcerer’s Stone.”

“We are in the process of doing a major renovation to Columbia Mall, and we’re extremely excited to get it reopened,” said Eric Snyder, senior vice president and director of corporate leasing for CBL & Associates. “We wanted to have an operating theater on our property. Although it’s fairly new, we’re pleased with its sales since opening.”

The theater subsequently enjoyed a prosperous holiday season and has seen steady increases in attendance, Zacheretti said. The company spent about $250,000 cleaning and renovating the building and predicts that after the first full year, it will earn about $2 million in gross revenues.

After their horror show, cinema chains are now more cautious about expanding.

In late February Phoenix came to the rescue of another developer when it took over management of an eight-screen cinema at Worldgate 9, a mixed-use retail project in Herndon, Va., owned by The Rappaport Cos. Loews Cineplex Entertainment Corp., New York City, had disavowed its lease on the property after filing for bankruptcy, said Gary D. Rappaport, SCSM, SCMD, CLS, president and CEO of The Rappaport Cos., leaving a big potential hole at his project. He said he was reluctant to tear down the building or change its use because a cinema was synergistic with the Marriott hotel and a 10-story office building at the center, which also contains 250,000 square feet of retail. So he put up $700,000 to buy and renovate the theater, and brought in Phoenix to operate it.

Phoenix never let the theater go dark, even during the renovation; consequently, the cinema was a Loews theater one day and a Worldgate 9 the next, Rappaport said. Though the new theater has not yet earned as much as the previous Loews, it is getting there, he added.

This company’s strategy is to treat its customers well and earn their loyalty, explained Zacheretti, executive vice president of Phoenix. Having started in the business as a 15-year-old usher, Zacheretti knows a thing or two about his customers.

“They [the bankrupt chains] were focusing on the larger, more profitable sites and neglected the six-, eight- and 10-screen operations.”

Phoenix wants to avoid going head-to-head with the big operators. What helped get the latter into trouble in the first place was that they were building rival multiplexes across the road from each other. Indeed, Phoenix would rather operate theaters where there is no competition within three to five miles, said Thompson, president of Phoenix and an ICSC trustee.

Thompson says he is confident that there is a profit to be made from the smaller, traditional theaters that not so long ago the industry considered as anachronistic as the silent movie.

“I think that as an industry, we’ve discovered that the megaplex is not the best and only answer and that an underperforming megaplex can be a disaster,” he said.

Nevertheless, some newly formed cinema enterprises are putting their money on the larger-theater formats. One Liberty Properties, a Great Neck, N.Y.-based owner of net-leased properties, formed a joint venture with Deutsche Bank last November to acquire net leases on top-performing movie theaters in healthy markets.

“We’re focusing on stadium movie theaters because of the competitive advantage that they have in the market,” said Jeff Fishman, president of One Liberty, adding that they offer more-comfortable seats and an overall better cinema experience.

The venture kicked off with the purchase in November of a 20-screen stadium movie theater in Norwalk, Calif., for $12.5 million. The property is triple-net-leased to American Multi-Cinema and guaranteed by its parent, AMC Entertainment. The Kansas City, Mo.-based company was the only top exhibitor that avoided bankruptcy.

“We focus on the real estate and believe in the theater industry,” Fishman said. While the negative attention surrounding movie theater operators frightened away investors, he said it worked in his favor as he zeroed in on fundamentally sound theater properties.

Meanwhile, one company has come out with an even gutsier idea: San Rafael, Calif.-based Century Theatres is busy opening a new line of cinemas devoted to art films.

The company, which operates 850 screens in 11 states, launched CineArts in November 2000, promising to class up the moviegoing experience for those with nonmainstream film tastes. Besides showing art and independent films, CineArts cinemas offer filmgoers a bistro and jazz music. And while these patrons have traditionally tolerated threadbare seats and peeling paint to see artsy films, CineArts cinemas provide stadium seating and qualify for THX certification — industry guidelines for theater setup, said Victor Castillo, senior vice president of corporate development for Century.

Century has opened two theaters in California — in Palo Alto and Mill Valley and a third in Evanston, Ill., where it is also experimenting with a live jazz performance space. A fourth CineArts is going into Santana Row, the urban infill project that opens in the fall in San Jose, Calif.

When scouting potential theater sites for the new concept, Century looks for metropolitan markets with a well-educated population, said Castillo.

Castillo is not specifying how many CineArts theaters the company will eventually open. That, he said, is in line with the company’s overall business strategy: to go where the opportunities are, rather than focus on opening a set number of screens every year.

But he did say that, unlike the fallen industry giants, the company’s idea of the Far East would be Chicago.

“Our strategy is to stay west of the Mississippi River and not take it nationwide, Castillo said. “We stayed focused on the markets we were in and added a limited amount of markets to pursue.” It might be a good idea for everyone to build just as cautiously, said BNP Paribas’s Maxwell, noting that there are between 4,000 and 5,000 movie screens too many in the United States now.

“We still believe that there is an excess amount of supply out there that needs to be taken out,” he said. “At the end of the day, a theater has limited alternative uses.”

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