The Costs of Empty Seats for Movie Theaters
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People simply aren’t going to the movies anymore. The situation is so dire that studios keep pushing major releases to an undetermined date in the future. After the newest James Bond film, No Time to Die, was delayed until next year, Cineworld announced it will suspend operations of U.S. Regal locations.
To get a handle on how the pandemic has battered the movie exhibitor business and its hope for a comeback, GLG spoke with David Ownby, former executive vice president and CFO of Regal Entertainment Group. Following are a few select excerpts from our broader discussion.
What are the financial drivers at play in Cineworld’s decision?
Cineworld has the worst outlook for liquidity out of the three major cinema companies, and that was born of a couple of things. Obviously, the pandemic caused a significant disruption to business. But on top of that, Cineworld has had a one-dimensional capital structure. Essentially its debt is in a term loan and a resolver, and in this situation where it needs access to liquidity, that’s made it difficult for the company to access the market. AMC, on the other hand, even though it has a worse leverage position, has had a multidimensional capital structure with term loan and bonds, and subordinated debt. It’s been able to leverage that flexibility into a bit more of a liquidity runway than Cineworld has.
The reason we’ve seen Cineworld elect to suspend operations is that it believes that will result in the lowest cash burn in the near term, until such time that it can get a real, consistent supply of product out of Hollywood. As of June 30, the most recent number that Cineworld has released, it had about $384 million of liquidity. I suspect that by the end of September, that number will probably be down in the $200 million to $250 million range and declining.
What sort of monthly cash burn can AMC and Cineworld expect at zero operations, and what does it take to strike a break-even level?
Based on the numbers they filed, and the comments leadership has made publicly, I’d estimate that in full-shutdown mode, Cineworld’s cash burn is somewhere in the neighborhood of $50 million a month. AMC has said its number is higher than that, maybe as much as $75 million a month. That’s just a reflection of the different rent structures of the two companies. AMC has a bigger fixed cost to pay every month, even when shut down. To break even operationally, both these companies need to do about 50% to 60% of normal attendance, using 2019 as a base.
Why has Cineworld elected to close its Regal theaters, while AMC and Cinemark have seemingly remained open?
That’s just an indicator of how dire Cineworld’s liquidity situation is. The other two have been able to secure additional liquidity. They’ve got a bit of runway to get back to a place where they can potentially get a steadier supply of product from the studios, and in that environment, they want to give the studios confidence that when they’re ready to release products, theaters will be ready. What we may see them do is curtail their operating hours. They may close on some days of the week and just be open on weekends, which is what Odeon is doing with a quarter of its theaters. They may just cut back to one or two sets of shows per day during the week, as opposed to being open from noon to midnight.
What are some of the ongoing costs that make these companies’ cash burn so high, even at a point of roughly no operations?
It’s primarily the property costs: rent, real estate taxes, common-area maintenance charges, and property and casualty insurance. Even shut down, they still have some level of utility costs. The light switches may be off, but electricity is still on. They still want to climate-control the building to make sure there’s no damage to it. All those costs add up. A portion of those costs run directly through the lease. Given Cinemark’s liquidity crunch, I cannot imagine it’s doing anything other than emergency capex. The difference between the cash burn between being fully closed and operating a limited schedule is just payroll. Meaning all hourly workers are home so they’re not incurring any hours and salaried employees are furloughed.
What is the value of lease assets in a bankruptcy? Is there any chance that landlords may seek to nullify leases in bankruptcy?
It depends on the terms of the bankruptcy. When Regal went through bankruptcy in the early 2000s, we had the opportunity to reject or renegotiate leases that were unprofitable. Obviously, if a landlord chooses, they can decline to negotiate and take their assets. But to the extent the company wants to continue the lease as is, that would be its option and not the landlord’s.
The best thing for the long-term health of the industry is that the screen count, particularly in the U.S. but potentially in other parts of the world, gets rationalized to some extent. There are 40,000 movie screens in North America. I would argue that’s 6,000 to 8,000 too many, since the bottom 15% of screens generates only 5% of the box office. Wherever people live, half a dozen theaters could just close and nobody would notice. Other theaters could then pick up the slack. In that situation, every theater would be a little healthier, and exhibitors would have more money to reinvest into the business.
AMC probably has the most polarized asset base of the three. It has a lot of high-grossing theaters. In fairness, AMC has a lot of bad stuff, much of which it bought from Carmike a few years ago, so it could cut a lot at the bottom and be better off. Cinemark’s probably the least polarized of the three. It may not have as many high-grossing theaters as AMC or Regal, but it doesn’t have as many losers either. Regal is somewhere in between. The market share losses it’s taken over the past 12 or 18 months has probably increased its number of bottom-tier theaters. It could certainly benefit from some type of reorg that’d allow it to shed bad assets.
Thinking about Mulan, will any future tentpoles move to premium video on demand?
Obviously, Disney and other studios don’t typically release a lot of data about home video releases the way they do the box office. So it’s difficult to say exactly how Mulan did. Having said that, typically when movies are a huge success, the studio is not bashful. Disney hasn’t done that, which tells me Mulan probably wasn’t a home run. My view is that regardless of what distribution channel Disney chose for the movie, it didn’t have high hopes for it. Therefore it was willing to use Mulan as an experiment. We’ll have to see what Disney’s comments are. But for now, I view it as not very telling about the future of premium video on demand (PVOD).
In terms of other films possibly headed to PVOD, what we’ve generally seen is that the movies studios have high expectations for and believe will drive significant box-office revenue have been delayed. James Bond, Wonder Woman, Fast and Furious, and Batman have simply been taken off the release calendar, with no real discussion of taking those to premium VOD. The films that they elected to do that with are probably at best second-tier films in terms of box office expectations. In this environment, the studios have been willing to experiment with them. Aside from Universal with Trolls, I haven’t heard anybody stand up and beat their chest about how great those releases have been, which tells me that model is one they’re still evaluating.
Do you expect permanent losses from direct streaming as a result of COVID-19?
If studios start to choose other distribution lanes because they’re emboldened by some of the experiments they’ve taken on during the COVID-19 shutdown, that may ultimately result in fewer wide-release films every year. That in the long run will have impact on the box office. It depends on how many films that is. Today, I think the top 75 films each year typically make up about 85% of the box office. Those films should be relatively safe from any significant changes in the distribution model. The remaining films are where there could be some shifts to streaming.
But at this point, I don’t believe anything will change consumers’ behavior. People are not hermits. They’ll still want to leave their houses and be entertained. When they choose to do that, movie-going remains affordable and accessible.
About David Ownby
David Ownby is the former Executive Vice President and Chief Financial Officer of Regal Entertainment Group. During his roughly 20-year tenure at Regal, he also held the title of Senior Vice President of Finance and Vice President of Finance. He is currently an independent consultant, with extensive experience in the cinema and entertainment industries and a range of insight into the evolution of streaming services and market dynamics across the media and entertainment landscape.
This article is adapted from the October 7, 2020, GLG teleconference “Cineworld, AMC, and Cinemark: Implications of Suspended Theatrical Operations.” If you would like access to this teleconference or would like to speak with David Ownby, or any of our more than 700,000 experts, contact us.