In Arizona, Plans and Construction for New Movie Theaters

Last June, Harkins Theatres, an Arizona-based movie theater chain, made its debut in California, opening with a state-of-the-art, 16-screen cinema complex in a mall in Moreno Valley. Harkins' arrival led to the closure of an eight-screen facility owned by UltraStar Cinemas at the edge of the mall.

Soon, San Diego-based UltraStar will return the favor. The company, which owns 100 screens spread across a dozen locations in southern California, is making its first venture into Arizona with a theater in the Phoenix suburb of Surprise. The theater is expected to open in 2008.

But that's just the start: UltraStar has signed a deal with shopping center developer Glimcher Ventures Southwest, headquartered in Phoenix, to build another half-dozen theaters in Arizona over the next three years. This in a marketplace owned for years by Harkins. And UltraStar isn't alone - at least three other theater chains are considering sites in Surprise, a town of 120,000 that until recently had no movie houses at all.

"Harkins is a good company and I respect them a lot," says Alan Grossberg, president and CEO of UltraStar, which he founded in 1998. "But Arizona is growing very fast right now and we want to participate in that growth. The old boundaries in this business are changing."

New expansion era

The theater industry, which enjoyed a construction boom in the mid- to late-1990s before overbuilding forced at least a half-dozen overextended chains into bankruptcy in 2000 and 2001, is back on an expansion binge. Shopping center owners, who had grown wary of cinema tenants prone to dump leases unexpectedly, are back courting major exhibitors.

Facilities erected just a decade ago, at the dawn of the stadium seating era, are suddenly looking aged and vulnerable again as the industry morphs to outsized I-MAX screens, digital projection technology and upscale amenities like bars and restaurants on premise. Competition has never been more ferocious.

Movie studios once routinely granted an exhibitor exclusive rights to show a newly released film within a protected radius of 10 miles or more in most suburbs and small towns. A few years ago that radius had shrunk to three miles. In the next couple of years it could shrink to nothing as theater chains set up for business across the street from each other, as Harkins did in Moreno Valley. Some experts foresee a day when theaters compete against each other just as Target and Wal-Mart do today, cheek by jowel.

Right now every chain is jockeying for the best sites. Harkins, which opened just one new theater as recently as 2002 and none in 2003, is opening a half dozen locations this year and another five or more next year. "This is our most active period in a long time," confirms Michael Bowers, president and chief operating officer of Harkins, which is based in the Phoenix suburb of Scottsdale and family-owned since 1933.

Theaters cost an average of some $1 million per screen, including the land, to build. Bowers is negotiating his way to expansion by taking advantage of shopping center developers' willingness to finance construction through build-to-suit deals. A 14-screen complex going up in the new Park West lifestyle center in the Phoenix suburb of Peoria, developed by General Growth Properties Inc. of Chicago, is being built in that manner.

"Shopping center developers viewed all theaters as bad investments for a long while. Now they recognize that theaters can be an important part of a center's success," Bowers says.

With older theaters being taken out of service in many places, the statistics on industry growth only tell part of this renaissance story. In 2006, according to the National Association of Theatre Owners in Washington, D.C., the number of movie screens in service in the U.S. rose 2% to 38,439.

That comes on top of a 3% gain the year before. From 2000 to 2004, the number of theater screens around the nation actually declined. So did the number of movie facilities - from a peak of 7,744 in 1995 to just 5,939 last year.

John Fithian, president of the Theatre Owners group, thinks the tide has firmly turned. "The industry went through a period of retrenchment around the time of 9/11," he says. "But now we're building again. We expect to see strong positive growth in screen-count again in 2007 and beyond."

Tough movie critic

Willis Johnson, who started with a single-screen theater in suburban Chicago in 1978 and built his company, Tivoli Enterprises Inc., into a chain of a dozen facilities with 86 screens, has seen this expansion wave before and is worried.

In the late 1990s, he recalls, big national companies raced to put up the latest megaplexes. They built too many too fast, and were consumed by debt and lower-than-expected attendance that led to the demise and sale of such names as Lowe's and General Cinema. Now he sees a similar arms race to build and the prospect of another round of over-saturation.

"If you can find a good location that's underserved, then by all means go ahead and put up a theater. But there aren't many sites like that left now," Johnson says.

"There's a lot of money available to finance growth for these companies, but maybe there's too much money pushing for more growth than the market can stand."

Thus, the boom-and-bust cycle of movie theater development is bound to play out yet again. As usual, the well-capitalized operators with the best assets in prime locations will be most likely to weather the storm.

Wall Street plays major role

Some of the confidence exuded by movie theater chains today stems from rising revenues. U.S. box office receipts were up nearly 6% last year to $9.48 billion. Attendance rose 4% to 1.45 billion admissions. Those aren't all-time records, but they demonstrate that the advent of Netflix mail-order DVD rentals, downloadable movies off the Web and wide-screen home entertainment systems aren't going to put the neighborhood megaplex out of business anytime soon.

It's not just developers who have restored faith in movie chains. Wall Street is hungry to invest in the action, too. As of late April, both the industry's No. 2 chain, AMC Entertainment Inc. of Kansas City, Mo., and the No. 3, Cinemark Holdings Inc. of Plano, Texas, had filed prospectuses with the Securities & Exchange Commission to go public.

Cinemark, currently the owner of 203 movie houses with 2,477 screens, hoped to raise $400 million in its stock sale, while the larger AMC, owner of 411 theaters and 5,635 screens, set a goal of $750 million in its sale of shares.

The stock offerings come despite dour earnings. AMC has had nine straight years of losses, while Cinemark only returned to profitability last year after losing money in both 2004 and 2005. Cinemark had been owned since 2004 by the Chicago private equity firm Madison Dearborn Partners.

What will these companies - both of which trail publicly traded Regal Entertainment Group of Knoxville, Tenn., which has 539 theaters and 6,403 screens and a leading 17% share of the U.S. movie house market - do with the cash they raise? Some of it will be returned to investors but a sizable chunk is going to be poured into new development, too.

Cinemark, for instance, reveals in its offering documents that it is planning to erect 28 theaters with 418 screens in the U.S., ranging from markets such as Austin, Texas, and Reno, Nev., to Napa, Calif., and Valparaiso, Ind. It will put up another eight screens offshore in countries like Brazil and Taiwan.

Healthy ticket sales

Ongoing consolidation also is continuing as the biggest chains gobble up smaller rivals. In October, Cinemark paid over $1 billion for Century Theaters Inc. of San Rafael, Calif. Eric Handler, an analyst at Lehman Brothers in New York, says that Regal has earmarked an additional $300 million for future acquisitions.

Handler projects a 6% rise in U.S. box-office receipts overall this year as surefire hits such as "Spider-Man 3" and "Shrek the Third" draw big crowds. "A bullish outlook for the upcoming summer film slate continues to reinforce our belief in the exhibition industry's cyclical upswing," Handler says.

The second and third tiers of movie-house chains are likely to expand just as fast as the giants. Kerasotes ShowPlace Theatres LLC in Chicago, for example, the nation's sixth largest operator with 685 screens in 81 theaters, opened two suburban Chicago facilities in November, one with a dozen screens and the other with 14. It has started construction on another theater that will include an I-MAX auditorium in the suburb of Bridgeview.

There will be two more theater starts by Kerasotes this year. In addition, the company inked a deal to acquire Colorado Cinema Group LLC in Denver, the city's largest movie operator with 125 screens and 11 theaters, for an undisclosed price.

"A lot of theaters still haven't modernized," says Anthony Kerasotes, the president and CEO of Kerasotes. "We see holes in the marketplace everywhere we look."

Lenders join supporting cast

Financing all these deals doesn't seem to be a problem. Kerasotes taps credit lines at both Providence Equity Partners Inc. in Providence, R.I., and Deutsche Bank AG's New York office.

Executives at Muvico Entertainment LLC in Fort Lauderdale, Fla., agree. The company is a breed apart, erecting splashy movie palaces with ornate chandeliers, adults-only auditoriums, bars and restaurants and even plush sofas for seating.

Muvico, with 247 screens in 13 locations, is taking aim at Kerasotes's home market of Chicago, with construction underway on an 18-screen complex in suburban Rosemont. It's part of a sprawling entertainment hub that will include a hotel and water park. The construction cost in Rosemont will approach $40 million, says Michael Wilson, Muvico's vice president of real estate. He's seeking more sites in Chicago for similar facilities.

Wilson says theaters like his are being viewed as an entertainment anchor in the upscale lifestyle shopping centers that are being built in so many places. But he also recognizes that AMC and Cinemark have set their sights on some of the same venues, and he expects competition from them to heat up soon. "Shareholders are going to demand steady growth from these chains once they're public," he says. "There will be pressures on management to go out aggressively and secure new construction sites."

Theater chains go full circle

For their part, many developers are pitting the movie chains against each other as they erect new shopping centers. Last fall, Cleveland-based Forest City Enterprises erected its new Shops at Northfield, a lifestyle center on the site of the old Stapleton Airport north of Denver, with an 18-screen Harkins Theatre as anchor.

Forest City has also begun construction on shopping centers in Richmond, Va., and Tampa, Fla., with pads reserved for theater operators, but nobody has signed on just yet.

"We've talked to several operators and find there is a lot of competition right now for good shopping center sites. We expect to have deals by the fall," says James Richardson, vice president of commercial development at Forest City.

Movie houses increasingly are built adjacent to clusters of restaurants. "They feed off each other," Richardson notes. And yet theater tenants aren't without their drawbacks: they require gobs of parking, which raises the hackles of adjacent restaurant operators. "You've got to position a theater carefully in your center to avoid conflicts," Richardson admits.

As for the operators, they're also facing off against newly hatched chains in some places. One of the most prominent is Sundance Cinemas LLC, based in Los Angeles and associated with the actor Robert Redford (an investor), which has one theater open there and another in Madison, Wis., with yet a third planned on the site of a shuttered old candy factory on Chicago's west side. In Illinois it will butt heads against another new chain, Chicago-based Eagle Theaters LLC, which has acquired an old theater in suburban Park Forest and is constructing a new facility in the small downstate town of Clinton.

Renovation rollout

Not every chain is plunging headlong into the search for new construction sites. Marcus Theatres Corp. of Milwaukee, owner of 52 theaters with 629 screens, is opening up just one new facility this year in the Milwaukee suburb of Brookfield.

The company in March paid $76 million in cash for 11 theaters with 122 screens, most of them in Iowa and Minnesota, owned by Cinema Entertainment Corp. of St. Cloud, Minn. The price computes to about $620,000 per screen, far lower than the average of $1 million per screen for new construction.

But Marcus expects to invest heavily in the next couple of years in modernizing Cinema Entertainment's assets as well as its own theaters.

"We're putting in new lobbies and concession stands and adding upscale finishes like tile and hardwoods in many of our locations," says Carlo W. Petrick, a Marcus spokesman. "We think it's important to ensure that our existing locations are competitive."

Nevertheless, Robert Damron, an analyst with 21st Century Equity Research in Milwaukee who follows the fortunes of Marcus, thinks the company can modernize existing units while boosting its new construction program at the same time.

"Marcus and the rest of the movie industry went through a soft patch a few years ago, but now it appears that trends are turning positive again," Damron says. "Marcus has become re-energized about its prospects."

Lee Murphy is a Chicago-based writer.


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