If it were a movie plot, the predicament facing Southern California cineplexes would be a real nail-biter.
The parent companies of scores of L.A.-area movie theaters are on the financial rocks, burdened with heavy debt from aggressive expansions and upgrades, a slew of outdated movie houses and lower-than-expected summer ticket sales.
As a result, major chains, including Edwards Theatres Circuit Inc., Newport Beach, have filed for bankruptcy protection while working frantically to unload unprofitable older theaters, which have been rendered obsolete by new theaters with stadium seating and digital sound. (See related story, page 1) Along the way, leases have been broken, theaters closed and commercial projects dependent on cineplex foot traffic are running into trouble.
And that’s just the beginning.
“This is going to cause massive indigestion for the landlords of these developments,” said Jack Kyser, chief economist for the Los Angeles Economic Development Corp.
The stumbling industry has already thrown a wrench into many developments, and the fallout from the once-touted “re-screening of America” will affect development in Los Angeles for years to come.
Time for a Change
Some say the shakeout signals that it’s time for the concept of retail centers anchored by movie multiplexes to fade from the scene. Indeed, cities and developers already are being forced to consider other approaches to retail development.
One example is the proposed 18-acre Queensway Bay retail project in Long Beach, which initially called for a 16-screen Edwards theater and Imax facility. Edwards has since withdrawn from the project, confirmed Robert Paternoster, who is overseeing the development for the city of Long Beach.
(A spokeswoman for Edwards would not comment on any particular development deals, but did say the 736-screen chain is reviewing all its leases as part of the bankruptcy filing.)
The city hopes to find a replacement theater chain shortly. But even if it does, Paternoster believes financing future theater-anchored retail projects and keeping them going will get more difficult because of the trouble faced by movie chains.
“There may have to be a new mix in some of these centers,” Paternoster said. “The theater is critical because it brings the locals back, over and over again. If the theaters are not there to generate that repeat business, it’s going to be tougher to have those retail stores there.”
At J.H. Snyder Co.’s Howard Hughes Promenade project in West Los Angeles, founding partner Jerry Snyder cut his losses early, terminating a deal with Edwards two months ago.
“Let’s just say I’m lucky,” Snyder said.
Meanwhile, Snyder said, he’s lost interest in projects with theater anchors.
“That’s not going to happen for awhile, unless it’s select locations,” Snyder said.
Signs of Trouble
The trouble faced by theater chains has been brewing for several years. Kansas City-based AMC Entertainment Inc. essentially sparked the nationwide explosion of megaplex construction in 1995 by creating an incredibly popular new product featuring stadium seating. Other chains rushed to join the building boom. But as the state-of-the-art complexes went up, interest in more traditional theaters declined.
The number of actual theaters has remained relatively flat since 1995, hovering somewhere above 7,000 nationwide. But the rush to go megaplex sent the number of screens skyrocketing from 26,995 in 1995 to 36,448 as of 1999, according to the National Association of Theatre Owners.
Michael Florin, an equity analyst with Gerard Klauer Mattison, said the newer megaplexes aren’t doing too badly.
“It’s the older theaters that are killing profits, and that dragging effect is what no one counted on,” Florin said.
L.A. retail developer Rick Caruso agreed that there is still a place for state-of-the-art theaters.
“I don’t view it that there’s a glut of theaters,” he said. “If anything, what there’s a need for is stadium seating. (Theater chains) need to work themselves out of their financial problems.”
WestStar Holdings Inc. tried to sell Mann Theatres just 13 months after buying the 374-screen chain from a partnership of Viacom Inc. and Time Warner Inc. for $166 million. There were no takers.
Frustrated, Encino-based WestStar filed its voluntary Chapter 11 bankruptcy petition in September 1999. Four months later, the Mann chain emerged from bankruptcy with a $91 million sale to WF Cinema Holdings,a new joint venture of Time Warner and Viacom.
Conversions, Upgrades on Horizon
Though officials at Mann, Time Warner and Viacom have remained tight-lipped, steps already have been taken to whittle Mann into a smaller, leaner and profitable chain.
WF Cinema reportedly has recouped more than half the purchase price by selling theaters. WF Cinema plans to retain about a dozen Mann theaters, and upgrade them. Two different companies have bought Mann theaters so far, with a simple plan: upgrade or convert them to other uses.
“In a number of cases, we’re gutting and remodeling them as stadium theaters,” said Philip Harris, president of Signature Theaters based in Oakland, which in May added 68 Mann screens to its holdings for a reported $20 million. “In a couple of cases they were hopeless to begin with.” n
Peinemann is a staff writer at the Los Angeles Business Journal.
