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Now playing: Chapter 11

Developers cope with the multiplex shakeout

By Debra Hazel

Crown American Properties has re-leased a shuttered General Cinema to Borders at Viewmont Mall in Scranton, Pa.

SCT saw the problem coming in a December 1999 front-page article.

It was a disaster everyone could foresee, yet no one could seem to stop. But this is real, not a night at the movies. As long as 18 months ago, experts were warning about the overbuilding and overly expensive construction of multiplex and megaplex cinemas, saying that a shakeout was bound to occur (SCT, December 1999).

“You’d have to have been living on Mars not to see it coming,” said Robert Michaels, president and COO of General Growth Properties, Chicago, and an ICSC trustee.

But expansion continued, and that growth, combined with a weak summer 2000 box office, has led to a series of U.S. cinema chain bankruptcies: Mann Theatres, WestStar Theaters, Silver Cinemas International, Carmike Cinemas, General Cinema, United Artists Theatres and Edwards Theatres have all filed for Chapter 11 protection. Meanwhile, Regal Cinemas, Loews Cineplex and AMC Theaters have reported substantial losses that many expect could lead to filings in the not-too-distant future.

As a result, the “retail-tainment” that was perceived just two years ago as a savior of the shopping center industry has now become yet another challenge to overcome. And the questions about how many individual theaters will be shuttered and what will be done with the vacant real estate remain.

“Entertainment real estate sort of became an industry buzzword; everyone was so worried about the Internet. But people only devote a certain amount of time to entertainment,” and cinema must compete with television, sports (including the Olympics this year), Web surfing and other pursuits, said R. Keith Thompson, principal of RT Associates, a Knoxville, Tenn.-based consultancy. Thompson, an ICSC trustee, served as the director of real estate for Regal Cinemas until earlier this year, and remains a consultant to the chain.

A weak summer box office ($2.65 billion, down 5% from last year, according to Daily Variety) actually was the least of the industry’s problems, and it merely hastened a shakeout most observers considered inevitable.

The problem actually is due to growing pains: The late 1990s creation of the megaplex, with more than 14 screens, comfortable stadium seating, more elaborate food choices and the ultimate in sound systems, instantly made obsolete even five-year-old multiplexes, usually with only eight to 10 screens.

“If you didn’t rebuild your circuit, you were in trouble; the companies that didn’t rebuild don’t exist,” Thompson said.

But the companies that did build megaplexes didn’t close enough older units to remain viable.

“The question is, ‘Is the industry overbuilt, or under-shuttered?,’” asked Jay Shapiro, senior vice president for the theater and entertainment group in Trammell Crow’s Boston office, and previously an executive with General Cinema. “What they forgot to do was shutter the older screens that cannibalized their audiences.”

Or they contractually couldn’t close the units, points out Eric Snyder, senior vice president and director of corporate leasing at CBL & Associates Properties, Chattanooga, Tenn.

“Either [the theaters] were profitable, or had leases they couldn’t get out of,” Snyder observed.

The total number of movie screens grew from 23,745 in 1990 to 37,185 in 1999, a 57% increase, according to the National Association of Theater Owners, (NATO). But the number of movie admissions increased only 24%, from 1.18 billion in 1990 to 1.46 billion in 1999, according to North Hollywood, Calif.-based NATO.

Nor did it help that the theaters started violating their own policy of not building too close to the competition. Snyder noted that Carmike Cinemas opened a megaplex across the street from a Regal multiplex at CBL’s Coolsprings Galleria in Nashville.

“The theaters that are hurting are those sharing film in a geographic area. This also is hurting suburban megaplexes near a major mall which also has a theater,” Thompson explained. The mall multiplex is not attracting sufficient business to survive, but is siphoning enough to keep the megaplex from turning a profit.

In addition, the creature comforts of the modern megaplex came at a hefty price: Thompson estimated that many of the megaplexes cost more than $1 million per screen to build.

“This also comes at a time when the rating agencies are getting tougher. All theater companies are now rated below investment grade. This has forced the noninvestment-grade industry to high capital requirements,” slowing growth, said Jim Sullivan, REIT analyst for Prudential Securities, New York City.

Ironically, it is only in the last few years that theater woes could affect the shopping center industry. Originally, many mall owners were reluctant to place new multiplexes within their buildings, reluctant to cede substantial parking for customers who weren’t going to do much shopping. As a result, many theaters were placed on outparcels elsewhere on mall property, if they were included at all.

“What happened in the mid to late 1980s to the 1990s is that several owners changed their thinking about theaters,” Sullivan said. “They went for entertainment uses.

it was not unusual to see entertainment concepts in centers built over the last 10, 12 years.”

Now, the first question for landlords is: How many screens will close? Predictions have varied from Salomon Smith Barney’s 10,000 screens to Sullivan’s 8,000 screens.

“I would imagine that the vast majority of those multiplexes are attached to a regional mall, located on a pad, or are across the street in a community center spawned by the mall,” Shapiro of Trammell Crow said.
Some closings occurred even before Chapter 11 filings.

“We have nothing in development right now, and have closed 36 theaters in the last few weeks,” said Brian Callaghan, director of communications for Chestnut Hill, Mass.-based General Cinemas, speaking with SCT on Oct. 11, the day of the chain’s filing. Many of the theaters are adjacent or connected to shopping centers, he acknowledged.

General was to shutter an additional 17 screens in October, according to a Salomon Smith Barney report. However, Callaghan declined to comment on how the company is dealing with the landlords of the shuttered sites.

Columbus, Ga.-based Carmike, which filed for protection on Aug. 8, had 111 theater leases approved by the bankruptcy court to be rejected, according to spokeswoman Suzanne Brown. As of June 30, the chain had had 439 theaters, comprising 2,815 screens.

The closings should not have too much financial effect on the public companies.

“The overall risk to the mall REITs is somewhat mitigated as the majority of theaters in the portfolios tend to be newer large megaplexes. Additionally, the mall serves to drive more traffic to the theaters. That said, nearly all of the mall REITs have exposure to the older, smaller formats and could see several locations close,” Salomon Smith Barney said in October reports on various REITs. Generally, the firm lowered 2001 and 2002 funds from operations estimates by $0.02 per share to reflect theater closings.

That leaves landlords wondering what to do with the vacated properties. Most developers say they’ve been quietly preparing for the eventuality for a while.

“We get monthly sales from theaters; we’ve seen the trends, and we’ve been looking out there,” CBL’s Snyder said. The firm’s portfolio (excluding the not-yet-acquired Richard E. Jacobs centers) includes 27 theaters comprising 233 screens, totaling about 800,000 square feet.

Discussions are already under way with big-box tenants to take over a shuttered UA theater at Burnsville (Minn.) Center.

Much depends on a theater’s location; bookstores, discount linen stores or health clubs could replace those situated within a center, Shapiro suggested. Johnston, Pa.-based Crown American Properties has already re-leased a shuttered freestanding General Cinema in its Viewmont Mall in Scranton, Pa., to Borders Books, reported Chairman, President and CEO Mark Pasquerilla.

Outparcel tenants could include nonretail uses such as call centers. And while finding new entertainment uses could be a challenge, Thompson suggests an independent theater owner might use the situation to build his own small chain.

General Growth has been fortunate in terms of bankruptcies overall, losing a minimal number of screens, Michaels said. But he noted that for many developers, a closed theater could be a blessing.

“Keep in mind that most of these are 10, 12 years old, so there is a real opportunity to turn something that is not an asset any more into something better,” Michaels said.

But it won’t be cheap. Sloped floors must be leveled, nonsupport dividing walls removed. Costs could total $12 to $14 per square foot, Shapiro estimated. Even then, a developer isn’t left with a vanilla box that can be easily subdivided.
It’s all in a day’s work, according to Snyder.

“So we level the floor space for X dollars, or give them a shell space, and adjust the rent accordingly. We certainly have the construction capability,” he said.

Most professionals believe that the situation will be resolved relatively quickly, within 12 to 18 months, though Shapiro says the repercussions will last much longer.

“The ramp-up for new construction is 24 months. It will take us as long to unwind these,” Shapiro said.
Some expect there could even be new building, post-shakeout.

“As the chains shed unprofitable assets, they’ll be strong. There will be some business combinations that will hasten the shedding of screens. There will be a lot of pain, a lot of financial duress, but within 12 to 18 months, we will see some building again,” Thompson said.

And ultimately, the theater crisis is actually much less serious than the series of department store bankruptcies that took place a decade ago, most say; fortunately for developers, it comes during a healthy retail period. Vacant theaters will be re-leased, and customers will return to the theaters, once they find something they want to see.

“The retail industry is fundamentally stronger than five years ago. There has been a lot of consolidation, and the base is strong. And because of that consolidation, there is a shortage of desirable space. This makes these kinds of shocks easier to absorb,” said Crown American’s Pasquerilla. “The theaters are a challenge to managers, but we’re going to work our way through them.”