Movie Theater Skepticism Breeds Net Lease Opportunity

By Matthew Berres & Scott Bailey

Matt Berres & Scott Bailey, JLL

The net lease marketplace is as crowded as ever. Whether its retired apartment owners exchanging into net lease assets in order to accommodate a simplified life, foreign investors seeking the safety of long-duration stabilized assets or net lease REITs needing to deploy capital, the competition for single-tenant net lease properties is at all-time highs. For many, the low cap rate environment of retail assets does not provide sufficient returns. For others, the scale of office or industrial assets is too much. The specialty entertainment industry, specifically movie theaters, has proved an interesting sub-sector that has left the net leased investor landscape divided about the long-term viability of the concept at large.

The movie theater industry’s struggles have been well-publicized. AMC, Regal and Cinemark stocks are all down from their prices year to date, despite the S&P 500 and DJIA growing over 14 percent year-to-date. The omnipresence of online streaming services have captured the hearts (and eyes) of journalists, stock pickers and movie buffs alike. Yet, as is true of many newsworthy phenomena, things are not as bad as they seem.

Box Office Revenue Remains Strong

The first quarter of 2017 got off to a hot start at the box office, followed by under-performance in the second quarter. What’s important to note, though, is the cumulative annual growth rate for box office revenues has been 9.8 percent over the course of 2015 and 2016, according to net lease REIT EPR Properties. As disposable income continues to increase, spending on nonessential items such as movie theater visits will continue to grow. Therefore, as long as there is demand for movies, movie theaters should be well-positioned to capture this spending.

No Clear Path to Premium Video On-Demand

Despite the buzz surrounding premium video on demand (“PVOD”), there’s no clear-cut solution to implementing this. As AMC Entertainment CEO Adam Aron put it during the firm’s second-quarter conference call, “I can tell you categorically that no one is close to a resolution of this matter.” He added, “There is no industry consensus.” And while studio executives like the idea of reaching a broader audience sooner, they would lose the opportunity to sequence and resell content. Whereas before there were three or four windows where studios could monetize films, with a PVOD-only concept, that opportunity falls to one noted distribution insider.

Improved Theatre Experience  

By virtue of the long history of movie theaters, many are outdated. According to data provided by AMC from the last six years, movie theaters in the 12 months following a re-seating renovation experience attendance growth of 57 percent on average and operating cash flow growth of 225 percent on average compared to the 12 months prior. These figures indicate the pent-up demand for updated movie theaters and the revenue potential as new theaters are updated to meet consumer preferences.

As investors become more critical about how to place money into net lease assets, movie theater investment continues to be a breeding ground for debate. According to CoStar, the cap rates for single-tenant movie theater sales have risen 100 basis points in the last five years to a current average of 7.50 percent, with the majority of the increase coming over the last 24 months, mirroring the trends of larger format retail in general. And while movies are not likely to become the in-vogue asset class, they do prove an interesting investment opportunity for groups seeking concepts with long-term viability and higher yields.