Outlook for movie theater tenants
The traditional role of theater anchors is under threat, experts say, citing the hundreds of cinemas forced to close because of COVID-19, as well as a Hollywood studio’s move to debut blockbusters like Dune and The Matrix 4 on streaming video in 2021.
Cineworld Group, the parent company of Regal, announced in October that financial stress was forcing it to shutter 536 theaters, and those locations remain closed as of this writing. Meanwhile, other cineplexes were ceasing operations due to government-imposed restrictions, including stay-at-home orders affecting nearly the entire state of California. “This theatre is temporarily closed in accordance with local, state and federal guidelines,” read a message on the website of the AMC Promenade 16 in Woodland Hills. “It will reopen when those guidelines allow.”
Regal operates 7,076 of the roughly 42,000 movie screens in the U.S., per the latest estimate by the National Association of Theatre Owners. This past fall, Cineworld Group secured a $450 million debt facility amid reports that it was fighting to stave off bankruptcy. And AMC’s liquidity-raising effort seven included a program in which private parties could rent theaters for as little as $99. Globally, AMC is the world’s largest exhibitor with about 960 theaters, or 10,700 screens. This past November, the company reported a 90.9 percent drop in revenue for its fiscal third quarter, which coincided with the onset of the pandemic.
Theater closures are a concern for landlords like NewMark Merrill Cos. president and CEO Sandy Sigal. His company owns and/or manages 85 retail properties in California, Colorado and Illinois. The portfolio has around 10 theaters, all of which were shuttered as of early December. “It has just been extraordinarily difficult for the theater chains, and that always impacts our other merchants to
some degree,” Sigal said. “Some of our centers — I’m thinking of one in particular that has a theater, a gym and a bounce house — are more dependent on theaters than others.”
At theater-dependent properties in Sigal’s portfolio, sales totals during the week have been about 80 percent of what they were pre-pandemic, he says. However, weekends are when family-oriented and entertainment tenants extend a property’s hours of operation. With these operators dormant, weekend sales now may plummet to about 20 percent of pre-COVID-19 norms. “It destroys your
weekend business,” the landlord said, “and that has been a bummer. These exhibitors — they spent a lot of energy, time and money to make their theaters much safer, only to have a short run and be shut down again. So that has been cruel.”
Theaters’ key role at retail properties
Moviegoers have driven spending at neighboring shops, bars and restaurants since the turn of the 20th century. The presence of a theater also turns malls and shopping centers into 18-hour-a-day environments, said Richard Rizika, partner and co-founder of Beta, a consultancy that advises retail brands and property owners on their real estate strategies. “They really drive nights and weekends,”
he said. “Matinees also help to drive additional activity.”
This can be particularly important for nearby restaurants, added A&G Real Estate Partners copresident Andy Graiser. Indeed, co-tenancy clauses in restaurant leases can allow some eateries to get a break on rent or even vacate the property if the theater closes, he said. “It’s a major concern for landlords right now.”
While that hasn’t happened yet in NewMark Merrill’s portfolio, it is a concern, Sigal says. “This situation is not sustainable long term. The centers are programmed to operate in a certain way, and that includes our entertainment uses.”
Blockbusters and streaming video
Top-grossing movies like Avengers: Endgame, The Lion King and Frozen II are the lifeblood of North America’s $11.9 billion movie business, but when COVID-19 arrived, movie productions went on lockdown and the pipeline of blockbusters dried up. Announcing the temporary closure of Regal, Cineworld CEO Mooky Greidinger noted that Cineworld’s business model requires a full slate of high-profile films.
Good news, perhaps: According to Georgia Film, Music & Digital Entertainment Deputy Commissioner Lee Thomas, the coming year should see a full pipeline of productions. Dubbed Y’allywood for its robust production industry, Georgia gives production companies heavy tax breaks. In 2019, studios spent $2.9 billion to make 391 movies and TV shows in the state.
Earlier this year, stakeholders in the film and TV business developed COVID-19 safety guidelines, allowing studios to start shooting again, Thomas says. As a result, the Motion Picture Association and its six members — Universal, Disney, Paramount, Netflix, Sony and Warner Bros. — pledged to complete at least $2 billion worth of filming in Georgia for the remainder of 2020 and throughout2021. “We’re definitely going to blow past that number,” Thomas said. “We have at last count some 29television series going and then 12 features that were in production or preproduction. More are coming in, so it’s a good sign.”
But the supply of blockbusters is only part of the equation. With theaters crippled by the virus, Sigal says, studios have powerful incentives to release big-budget films on the streaming services they own, yet another drag on brick-and-mortar ticket sales.
And indeed, Warner Bros. Pictures announced on Dec. 3 that it would release its entire 2021 slate — 17blockbusters — simultaneously on streaming video and in theaters. The list includes Dune, Godzilla vs. Kong, The Suicide Squad and The Matrix 4. The company had already said Wonder Woman 1984would be released both on HBO Max and in theaters. “Moves like this will make it even harder for theaters to survive post-pandemic,” TSCG chief strategy officer Gregg Katz wrote in a Dec. 4LinkedIn post.
Landlords with second-run theaters should pay attention to this trend, Sigal says. Traditionally, these venues — which often are located in lower-income, underserved areas — drive traffic by showing major films after they leave higher-profile theaters but before they appear on streaming services and on cable TV. If straight-to-streaming dramatically shortens or eliminates that window, second-run theaters across North America would be in a quandary. “They won’t have any time to have those movies on an exclusive basis,” Sigal said, “and so they don’t know if their model is going to work at all.” Warner Bros. said each of its 17 blockbusters would leave HBO Max after one month “and continue theatrically in the U.S. and international territories, with all customary distribution windows applying to the title.”
Strategic options for theater owners
The traditional revenue-sharing model in the theater business is another challenge for theater owners right now, says Rizika. Under that model, Hollywood studios can take as much as 50 percent of the exhibitor’s box-office proceeds for a given film. In theory, exhibitors could seek relief from the
studios and negotiate better deals that bolster their odds of making it through this difficult time. On the other hand, that would lower studios’ box office proceeds for the, possibly giving them an even greater incentive to rely on pay-per-view at Disney+ or HBO Max.
To bolster their profitability, theater owners need to get creative with their existing square footage, Rizika says. For example, they could raise revenue by allowing community and corporate groups to use these spaces, pandemic restrictions permitting, for a fee. On a weekday, a company could run a team-building session in the theater and then watch a movie together. “Or let’s say you’re a big Formula One fan and a major Formula One event is on at 5 o’clock in the morning,” Rizika said. “How do we go ahead and create an opportunity for that to be introduced” in the theater?
Graiser says landlords and their lenders ought to revisit rents. “Some of these landlords have invested $8 to $10 million in theater renovations, and they need these operators to stay in business. ”Theaters might be tempted to seek short-term rent relief by giving up lease clauses that give them a say in how the center is tenanted or in what happens with the parking lot or other parts of the property. While that appeals to landlords, Graiser said, “in my view, both sides need to be more thoughtful than that and fix the long-term financial problems facing these theaters.”
Netflix and Amazon in the brick-and-mortar game
Another trend to watch is whether the likes of Netflix and Amazon will take advantage of depressed demand to snap up brick-and-mortar theaters for a song. This summer, Sigal notes, a federal judge allowed the U.S. government to scrap the so-called Paramount Decrees, decades-old antitrust regulations that stopped a movie studio from both showing and distributing the movies it owns.
The net effect is that the likes of Amazon and Netflix now can use movie theaters as marketing vehicles for their original content. Such online companies taking stakes in brick-and-mortar real estate could mean rental income for landlords. According to reports, Netflix already has leased New York’s Paris Theatre and has shown films elsewhere in Manhattan. And in May, the company closed on its acquisition of Hollywood’s Egyptian Theatre.
In announcing its move to run blockbusters on streaming video, Warner Bros. predicted reduced capacity at theaters for the rest of the year. That makes sense to Sigal, but Americans have always loved going to the movies, he said, and the situation could improve dramatically as COVID-19vaccinations progress. “From the theater chains that we talk to and based on the knowledge that they have today, we think the first quarter is blown,” Sigal said, “but I would not be surprised to see a pretty rapid return, maybe 50 percent of potential theatergoers coming back in April or May and up to 80 percent in the summer. It will be a long time before we get back to 100 percent. It all depends on what happens with the business model and theaters’ agreements with studios.”