In real estate we trust: Five-star Entertainment Properties align for investors and exhibitors


“If you talk to anyone in the exhibition industry about financing theatres, top of mind will be Entertainment Properties Trust,” says Gregory K. Silvers, the Kansas City, Missouri-based company’s vice president, chief operating officer and general counsel ( “We are an incredible capital solution for exhibition tenants and other kinds of specialty, niche-type of real estate. We start working with any client by listening,” he elaborates, “by trying to understand their business and to see what issues they are trying to solve. Can we provide a solution to their needs and still work within the constructs that we live by?”

Consequently, the publicly traded real estate investment trust (NYSE: EPR) has enjoyed “an international reputation for developing, owning, leasing and financing properties for consumer-preferred, high-quality enterprises.” With total assets exceeding $2.9 billion (see our sidebar for more details about the latest quarter) in a portfolio comprised of some of the industry’s highest grossing megaplex movie theatres, entertainment retail centers, as well as “other destination recreational and specialty investments,” Film Journal International wanted to find out what this business is all about.

“A real estate investment trust, otherwise know as REIT, is really a creature of the tax code,” Silvers draws the distinction to traditional corporations. “They take in revenue, pay taxes and decide how to distribute the balance to their shareholders and/or how much to reinvest. By comparison, a REIT represents a passive investment activity in real estate only. While we do not pay income taxes at a corporate level, the trade-off is that we must return at least 90% of our taxable income in the form of dividends to shareholders.”

As “the easiest way to explain this,” Silvers takes a multi-/megaplex theatre that costs somewhere around $14 million in land and improvements. “A theatre operator can make the investment and spend the entire amount on that one theatre. Or he can do business with us and leverage the capital that we have raised in the public markets. In that case, let’s say, two of that $14 million actually go to FF&E [Furniture, Fixtures, and Equipment]. Then they can take those $2 million and build seven theatres with us. The returns that a real estate company is expected to generate are far lower than an operating company such as an exhibitor has to generate.” Though these numbers are for example only, the REIT nonetheless helps diversify exhibitor risks. “Their investment per location is significantly lowered. Instead of putting all their eggs in one basket, they are able to spread that out over a greater number of locations and, with that, the overall returns are better for them as well.”

During the process, EPR generally becomes the land and building owning landlord to the exhibitor as tenant. “We do other kinds of arrangements as well,” Silvers explains that this structure does not apply to free standing theatre locations alone. “We do buildings that connect to malls and we have air-rights leases that control the space above another existing structure for 50, 60, 75 years. So, for example, we could build a movie theatre on top of a Target. We have our exhibition clients, who find a location where they want to build a theatre, and we work with developers that want to have theatres as part of their center. Developers come to us with a site where they handle the rest of the retail and offer us a pad of land to build the theatre on.” Don’t developers usually own the land and buildings? “Most of the traditional malls do not own their anchors,” Silvers notes. “Department stores like Macy’s and Dillard’s generally own their locations while the mall developers take on the infrastructure in between. As an entertainment attraction and anchor, a movie theatre is very often similar to these department store anchors.”

Historically speaking that represents quite a change in the perception of retailers and developers who, not that long ago, didn’t want movie theatres because of the “element” they supposedly brought in. Also theatres were resigned to spaces that fit within the mall set-up – simply put, flat floors rather than stadium seating – so that they could easily be turned back into stores. As theatres grew bigger and better, he concurs, the megaplex dynamics changed the real estate side as well. “When exhibitors were doing fours, sixes and eights that rolled out with the ‘Malling of America,’ they were really taking smaller spaces. With the megaplex, you were moving to a standalone building that, in some ways, is different from a lot of the other buildings in traditional real estate. People were not necessarily interested in making that size of an investment in that particular kind of special structure. Theatre operators all recognized that this sea change in the exhibition business … would require a significant amount of capital. At the same time, while they are great generators of cash flow, movie theatres to do not generally build up huge cash balance sheets.”

In other words, “there was a need for a real estate solution to meet the demand that existed,” Silvers recalls about going public in November 1997 to the tune of $254 million. “EPR was formed really out of the absence of financing for those structures. The IPO was based on a deal with AMC Entertainment, whereby we had an option agreement to purchase 13 properties from them. Always knowing that we were not just going to be singularly affiliated with AMC, but intended to service the needs of the entire industry, that package became our anchor beach-head transaction.”

Subsequently, EPR has “gone out and developed relationships with all major exhibitors,” adding 57 megaplexes valued at over $1 billion from Cinemark, Muvico, National Amusements, Rave, Regal and Southern Theatres over the ten year period to 2008 alone ( Today, 96 megaplexes with an average 18.3 screens per property (vs. 6.6 national average) account for $40.1 million or 56% of the REIT’s EBITDA (earnings before interest, taxes, depreciation and amortization). Nine entertainment retail centers with as many movie theatres contribute an additional 21%. 99% of EPR portfolio theatres have 3D projectors and 26 of them feature large format experiences (as described in our September through November issues). Further to a recent investor presentation (all values per March 31, 2010), approximately one third of megaplex theatres in EPR are number one in their respective metropolitan rankings. This number goes up to two thirds when expanding to the number four position and to a full 100% within the top third nationally. Best of all, perhaps, the “number of missed rent payments: 0,” the listing states. “EPR’s megaplex theatre tenants have never missed a rent payment.”

Given said performance indicators, “entertainment centers like Dundas Square in Toronto were a logical extension of what we were doing,” Silvers delineates the progression of the portfolio. “We found that our theatres created a tremendous draw of traffic. Yet, other people were capitalizing on that traffic by buying the land beside us. A significant number of ancillary businesses, such as restaurants and light entertainment, like to collocate with theatres, because of the demographic group they attract. We began purchasing additional land to accommodate other venues in the out-of-home entertainment space. It was a natural growth.”

Doing “the non-traditional property type” rather than retail, offices, apartments and the likes, secured further growth opportunities. “We were approached by people from different venue types to see if we would consider investing in their projects,” Silvers explains. After entertainment centers (contributing $14.5 mil. to EBITDA) EPR also added charter public schools (27 locations; $6.6 mil.) alongside investments in metropolitan ski areas (11; $3.7 mil.), vineyards and wineries (19; $3.3 mil.) and three ‘Schlitterbahn’ water parks ($2.9 mil.).

Based on the experience with megaplexes, EPR developed what has come to be known as the company’s ‘Five Star Principles’ for guiding its investments. “We asked ourselves,” Silvers recalls, “what made our investments in theatres so successful and can we apply that to certain other areas?” The first of the five criteria looks for the inflection opportunity. “Is there something going on in that industry where insightful capital can come in to serve a need and to become productive? With theatres that was the move to the megaplex. For charter public schools it was their very introduction as a valid alternative to the traditional public school system.” Though funded by the state, he explains, charter public schools are not being governed by the traditional community school board infrastructure that issues bonds so that schools can be built. “They really do not have the ability to fund their schools. This represents both change and demand in combination with a need for a real estate solution.”

Secondly, EPR is looking for an enduring activity when considering whether to invest. “Is it something that’s long lived?” Again, movie theatres and primary education are obvious examples for Silvers. “Going to the movies is not a flash in the pan. It’s part of our fabric of who we are.” Thirdly, EPR asks, “Can we identify excellent execution? Do we know what makes a good product from bad? Do we know the fundamentals of what makes a good theatre location or what is a good place for a school? We believe we do, because there are under riding aspects that we can identify. The fourth criterion for us is attractive economics.” Again, “the economic capacity of those two activities,” he feels, “generate sufficient income to be able to pay out a number that is attractive to our shareholders. The final goal is to operate in an area where we can gain and maintain an advantageous position. Either through our relationships, through our knowledge or our underwriting, can we get out ahead? To be more than just a commodity supplier of capital? We work with everybody and everybody knows us on both the developer and theatre side. To a large degree, we have become the dominant player in that space.”

Nonetheless, “the biggest perception that we’ve always fought – and that we continue to fight today – is that the exhibition industry is going away,” Silvers has observed. “Whether it’s television, VHS, DVD, DirecTV, video-on-demand – analysts and investors are always asking that same question.” As all of us in the industry will wholeheartedly agree with him that “we have to change their perspective. Going to the movies isn’t about the presentation alone. It is about the social experience, about leaving your homes for a good time. Part of that process is the communal experience of watching a film.” By selling this story continuously, along with AMC Entertainment founder Stan Durwood’s classic line that people still go to restaurants although everybody has a kitchen at home, progress has been made. “We have been, are and continue to be a firm believer in the fundamentals of the exhibition industry,” Greg Silvers emphasizes upon closing. “This is a business that is part of the fabric of society and enjoying entertainment is always going to remain that way.”

In entertainment we trust.

The Promise of China
For this edition’s special focus on Asia, we asked Greg Silvers to share his thoughts about this incredible market and elaborate upon his company’s investments in the region.

“China is very exciting for us. We were asked to tour the country as guests with SARFT, the State Administration of Radio, Film and Television. One of the issues for that group is that they want to build up their movie production. So many countries feel they get overwhelmed by Hollywood. If you don’t have an industry and not enough local films coming out, we will be overtaken, they fear. Fundamental to having any kind of valid in-country film product, however, is the fact that you must have retail stores. If you are creating content and don’t have the retail component to present that product in, the chain is broken.

On the other side, the burgeoning middle class that is developing in China represents a tremendous opportunity. Box-office growth averaged 30% or greater over the last five years in a country that is incredibly underscreened relative to the population. If you take our 350 million people or so here in the U.S. that is probably approaching the size of China’s middle class alone. You have 38,000 screens in the U.S. and probably in the neighborhood from seven to ten thousand screens for well over a billion Chinese. So, clearly, there is a tremendous opportunity for the retail component.

SARFT took us around and made introductions for us. We were very glad to meet some of the exhibitors that are doing business there and subsequently made a cooperation agreement with the Shanghai Film Group. We have since opened our first theatre in Ningbo, and are very, very excited about how it has been going. They are doing wonderful things over there and building state-of-the-art theatres with digital projection. It is really a very exciting market and we are looking to grow that platform. We have people in our organization who are dedicated to that endeavor as we are continuing to make strides. Hopefully we will develop other cooperative partnerships that can help accelerate the building process. There are a lot of retail developers that we are either currently doing business with already or that we have discussed doing business with.

There is a lot of opportunity, although we have gone slowly. Just because, the legal system is totally different legal system and there are many questions of capitalization. How do you get money into the country, how do you take it out? Therefore, we are moving very deliberately to make sure that what we think can be accomplished, will actually be accomplished.”