Failing cinema chains may cut landlord profits

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Carmike and Edwards Theaters Circuit Inc. filed for bankruptcy protection this month.

As many as five of the six largest theater operators could do the same because of recent overbuilding, according to Prudential Securities.

The firm predicts that as many as 600 theaters will close in the next few years.

That's bad news for owners of shopping malls and strip shopping centers that have aggressively added "entertainment wings" in recent years to counter a decline in shoppers.

"Landlords are probably going to get some space back, and the big issue is: Are they going to find a new use for it?" said Michael Torres, president of Lend Lease Rosen Real Estate Securities.

Between 1990 and 1999, the number of U.S. movie screens jumped from 23,689 to 37,185 as operators rushed to open new megaplex sites with as many as 30 screens, stadium-style seating and coffee bars.

With so many new options, consumers stopped going to the old theaters.

"The estimates are that we have 4,000 to 5,000 screens too many," said Prudential real estate analyst James Sullivan.

As a result, both Moody's Investors Service and Standard & Poor's Corp. have cut debt ratings on movie theater operators in recent months.

Mr. Sullivan and other analysts are trying to determine what the financial impact may be on mall owners as movie theater operators look to close unprofitable sites or renegotiate leases.

"There could be a negative impact on estimates and on tenants [such as restaurants] that feed off the movie theater business," he said.

"We are not recommending people abandon the group for this reason alone," he said, "but they definitely need to be more cautious."

Shopping center owners that could lose movie theater tenants include Simon Property Group Inc., CBL & Associates Properties Inc., Developers Diversified Realty Corp. and New Plan Excel Realty Trust, Mr. Sullivan said.

Carmike, for example, operates 11 theaters in malls owned by Tennessee-based CBL and accounts for 0.8 percent of the developer's revenue, said Kelly Sargent, CBL's director of investor relations.

And United Artists Theater Co., which defaulted on its debt in April, also accounts for 0.8 percent of CBL's revenue, and Regal Cinema accounts for 1.09 percent.

Carmike has closed two theaters in CBL's portfolio, but Ms. Sargent said it is unlikely they will close all of them because most are profitable.

"We see some upside in that we could find some new uses at higher returns for some of those sites," she said.

Finding a new use for a theater isn't so easy and is one reason that Kimco Realty Corp., the nation's largest strip shopping center owner, has stayed away from theaters in its properties.

"It's difficult to lease ... [old theaters] to anyone but a movie theater operator," said Scott Onufrey, head of investor relations of Kimco, based in Hyde Park, N.Y.

The theater chains' financial troubles are occurring even as box office revenue sets new highs.

Last year, the nation's theaters grossed about $7.5 billion, a 7.2 percent increase from 1998, according to the Motion Picture Association of America.

But much of the money has come from consumers attending the newer theaters. Productivity per screen has declined, Mr. Sullivan said.

Most analysts and landlords agree that older and smaller theaters – with fewer than 10 screens – are the most likely to close.

"On the newer projects, landlords are in a pretty good position," said Michael Kirby, head of independent real estate research firm Green Street Advisors Inc.

Investor fears about theater closings have hurt shares of Entertainment Properties Trust, a real estate investment trust that owns 24 megaplex theaters that are leased mainly to AMC. Its shares are down 9 percent this year.

Company officials and analysts say the fears are unwarranted. Even if AMC were to file for bankruptcy, all of Entertainment Properties' sites are profitable, with cash flow doubling rental payments, the company said.

"It's possible AMC could come back to us and ask to renegotiate, but it's not likely," said David Brain, president and chief executive of Entertainment Properties, based in Kansas City, Mo.