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Future of megaplex questioned

By Jon Springer

As the megaplex theater nears its fifth birthday, some question whether the concept can sustain itself.

It promised developers beefed-up sales and increased traffic, and it delivered. It offered customers superior sight lines and more comfortable seats, and they came. It threatened to change the retail and entertainment industries forever, and it probably will.

But as the megaplex movie theater approaches its fifth birthday, the celebration is somewhat muted.

Amid the explosive growth of megaplexes —multiscreen, stadium-seating theaters that have sprung up all over the United States since their introduction in 1995 — are concerns whether exhibitors can afford to sustain the revolution they started. The race to capture market share has left theater chains piling up construction debt for expensive new theaters and retrofits while struggling to divest locations that have become obsolete.

Often, theater chains have cannibalized themselves by building new theaters rather than redeveloping old ones in the same market. And some have hurt themselves by building megaplexes that are too big, and now find themselves looking at closing screens and subleasing the excess space. Investors, fearing overbuilding, have in the meantime stayed away from exhibitor stocks, putting additional strain on the chains’ financial flexibility.

Ironically, the concerns come at a time when — partially as a result of new theaters — domestic box-office receipts were on pace to surpass 1998’s $6.88 billion. While financial experts have no doubts that the industry will survive, the megaplex revolution is for the first time getting bad reviews. One theater insider, citing rising debt and flat profits, called the operating results of the top six theater chains in 1999 “pathetic,” and warned that chains building simply to protect market share will result in an “inevitable flow of red ink.”

This phenomenon can put property owners in an awkward position. Developers have already seen chains such as Mann’s and West Star Cinemas put into jeopardy as a result of their inability to compete with modern theaters. So while developers are compelled to replace their current theaters with megaplexes, their reward could turn out to be a high-traffic credit risk.

“As a prudent landlord, we always look at the financial strength of any tenant,” said Don Pollard, senior vice president of development for Simon Property Group, Indianapolis. “When we look at theater deals, which are more expensive, we look more than we ever did at the financial strength of the operator and make sure they can conclude construction and operate it efficiently.”

Some have accused developers of playing one theater operator off another in an attempt to jack up rents, which in turn has contributed to chains’ financial difficulties.

“There are certain developers who have auctioned their deals, and others who cultivate the relationships and see who’s best suited for the particular market before going to plan B,” said Lamar Field, vice president of real estate for Carmike Cinemas, Columbus, Ga.

Pollard, who specializes in theater deals for Simon, said local market expertise is a prime advantage for a particular theater operator.

“I can’t speak for other developers but we typically do not put our theater locations up for bids in the industry,” he said. “We look at who will be the best operator in that location and solicit that one first.”

John Venzon, vice president of real estate entertainment for Crown American Properties, Johnstown, Pa., agreed.

“We have to make sure the theater tenant has its finances intact because it’s a 50-50 venture,” Venzon said. “If we think the deal is unfeasible, we won’t do it. If its relatively feasible, we will.”

Venzon is quick to add that no deal comes risk-free: “The shopping center companies may not want to say it today, but there were always risks in this business. At times we may have to stretch for a deal but I think in the long term that’s going to help your property and your company.”

Crown American’s record with megaplexes has been impressive, he adds, citing the addition of a 13-screen Regal Cinemas theater to the company’s West Manchester Mall in York, Pa. According to Crown, small-shop sales since the megaplex opened in October 1998 have leaped as high as 28% over the previous year.

Such performance levels are what attract mall owners to solicit theaters, said Ron Fullam, senior vice president of development for CBL & Associates Properties, Chattanooga, Tenn.

“Entertainment has become such a staple of our business,” said Fullam. “We love theaters. We believe in them. We hate it when we can’t have them.”

Theater operators have already felt the effects of too many screens in some markets. In Ontario, Calif., a 30-screen AMC Theatre and a 22-plex Edwards directly across the street have generated low returns at both locations, noted exhibitor analyst Dan O’Neill of Credit Suisse First Boston, New York. A similar cannibalization is happening in downtown Toronto, where a 30-screen AMC is battling an 18-screen Famous Players, with no real winners.

In existing projects where megaplexes are impractical, redeveloping old, sloped-floor theater space is proving to be a difficult task. At at least one of its malls, Crown is hoping to attract Atlanta-based Cinema Grill, which combines second-run movies with casual dining.

Simon has converted old theaters to uses ranging from health clubs to big boxes to specialty stores, Pollard said.

Chains’ difficulty disposing of obsolete real estate is one of the major reasons investors have not embraced theater stocks, O’Neill said, helping to rein in expansion plans. Several chains, including Kansas City, Mo.-based AMC and General Cinema, announced cost-cutting restructuring plans this fall, resulting in the elimination of jobs and closing of regional offices.

O’Neill feels the worst is over if not close to over. Consolidation is a real possibility, he noted, mentioning AMC and Loews Cineplex as prime candidates.

“We’ve already seen the peak in building,” O’Neill said, “[But] attendance growth and ticket price increases are very strong.”

Property owners say they feel it is only a matter of time before theater chains get on their feet again. And by then, both exhibitors and developers will have learned a lesson.

“I think theater companies are very wisely relooking at the size and number of seats in their projects and I think we’re going forward with more properly sized theaters,” said Pollard.

“Yes, we’re seeing turmoil financially, Yes, we’re seeing consolidations. But we’re all hearing a lot wiser comments about how to go forward, and that’s a positive.”