Billion-dollar blockbusters like “Inside Out 2” and “Deadpool & Wolverine” are bolstering movie theater performance in a big way. It is a welcome comeback for a U.S. theater industry that saw its screens go dark during the pandemic and then faced costly strikes by Hollywood actors and writers. Nonetheless, theater operators continue to face lower box office sales than before Covid. Challenges include tough competition from streaming services and tighter purse strings among consumers hit hard by inflation.

Pre-pandemic, as noted by analysts for theater-industry tracker Comscore, U.S. theaters brought in annual box office revenues of about $11 billion. That plummeted to about $2.5 billion in 2020 and recovered to about $9 billion last year. The new normal is fewer screens and theaters chasing $9 billion or $10 billion, a Comscore analyst told the retail real estate trade association ICSC.

The higher costs of financing, construction, labor and real estate occupancy are putting further strain on some of these operators. Theater companies more than ever need the expertise and counsel of restructuring professionals and advisors—whether the goal is to stay out of bankruptcy court or pull off a Hail Mary of a Chapter 11 restructuring.

Footprint overexpansion

Real estate is a particularly important consideration for this sector. Over the past decade or so, a confluence of trends has strongly encouraged overexpansion:

• Mall and shopping center landlords, facing a wave of distress among traditional retailers that were vulnerable to Amazon, enthusiastically embraced tenant lineups packed with food, beverage and entertainment operators—theaters included.
• Cheap and easy-to-obtain financing encouraged chains to grow their footprints in an aggressive response to investor and landlord demand.
• The moneymaking promise of new “gastropub”-type locations with large, reclining seats and sales of alcohol and food spurred further real estate expansion and/or expensive renovations.

In addition, some theater chains renewed long-term, below-market leases at higher rates in the months leading up to the devastating Covid shutdowns. Others were paying too much for leaseholds in malls and shopping centers that were past their prime.

An example for restructuring theater chains

U.K.-based Cineworld Group and its U.S. Regal Cinemas division took full advantage of business and real estate restructuring to better position for the future. During Covid, the National Association of Theatre Owners estimated that Regal operated nearly 7,100 U.S. screens. Cineworld—the second-largest theater operator behind only AMC—smartly secured a $450 million debt facility and then took operational measures designed to provide about $750 million in emergency liquidity.

But in September 2022, facing $8.9 billion in pandemic-era debt and some $4 billion in lease liabilities, Cineworld filed for Chapter 11 bankruptcy. The company tasked A&G Real Estate Partners with executing landlord negotiations (including lease-restructuring and terminations) for Regal Cinemas. The company’s financial advisors and debtors attorney, meanwhile, focused on completing a complex restructuring transaction with the lenders, as well as multifaceted analyses and strategic consulting related to DIP financing, liquidity, business strategy, and even a new agreement for a critical source of revenue — on-screen advertising.

Just shy of a year later, Cineworld and its subsidiaries emerged from Chapter 11, having slashed funded indebtedness by $4.53 billion, raised about $800 million in new equity capital, and secured about $1.71 billion in new debt financing. Cineworld “looks well clear of that pandemic-era cliff, having greatly lightened its debt load as it rides Hollywood’s box office recovery,” noted The Hollywood Reporter in February 2024. More recently, Regal announced that it had raised $250 million and said it was “well positioned for accelerated growth through improvements to existing assets, and digital enhancements to the moviegoing experience.”

Todd S. Boruff, Regal’s Senior VP of Real Estate, told an advisor that A&G “took a lot of stress off the table for Regal” during the restructuring by executing a large number of transactions in a short time.

Do a deep dive into the situation

As restructuring professionals assist national or regional theater operators with their real estate, it is important to maximize leverage by coming to the table with a detailed understanding of the landlord’s position.

Theaters have always been key anchors for malls and shopping centers. As a result, some landlords have invested millions of dollars into theater renovations. They might also have agreed to risky co-tenancy lease clauses at the property. For example, a restaurant chain or entertainment tenant, per the terms of the lease, might be allowed to vacate or start paying substantially lower rent if the theater chain closes. Theater closure could even translate into a default in the landlord’s loan agreement.

In other cases, the landlord could be eager to drive rental revenue by allocating part of the parking lot for a new concept—for example, a high-volume, franchise coffee operator with a double drive-thru. Relinquishing control of that acreage could be a powerful bargaining chip for the theater operator, under the right conditions.

Treat landlords with respect

In too many situations, theater operators initiate discussions about rent-relief or other breaks without first gathering the information they will need to make the strongest-possible case while being fully transparent. Restructuring pros should impress upon theater operators the need to treat landlords as the sophisticated parties that they are.

Be able to explain what is happening—both in the theater industry and within that national or regional theater chain—and provide solid financial and market data. For individual locations, provide monthly numbers, projections and a clear business plan for turning that business around, based on the target occupancy costs.

Be clear with the landlord that without their support the theater will close. In some cases, an effective “carrot” can be to give the landlord a percent of profitability in the event of a successful theater turnaround.

Play strong defense

Precisely because no-build, co-tenancy and approval rights are so powerful, restructuring pros should be careful never to give these leverage points away prematurely. Find out how valuable these clauses are to both the theater owner and the landlord—and then exact concessions that meet or exceed that number. This is important, not just for theater chains, but also for any anchor or junior anchor with strong lease clauses and/or site-control.

Theater real estate, because of its sloped concrete floors, lack of windows and, in some cases, lower visibility relative to other parts of the shopping center, can be logistically challenging and expensive (in some cases, prohibitively so) for landlords to repurpose.

This is especially true given today’s high construction costs and tighter lending environment. Often, the landlord has strong incentives to work with the operator to keep the business open. Do not be intimidated by a landlord’s suggestion that a replacement use could easily be found, or by the landlord saying they could scrape the building and start “fresh.”

While the U.S. theater industry is poised to continue its slow recovery—analysts are optimistic about continued box-office growth in 2025—plenty of theater operators are still paying above-market rents and operating with inefficient, oversized portfolios. Theater owners lack the time and personnel to execute a portfolio-optimization strategy quickly. Relying on the objective, third-party credibility that fact-based restructuring advisors can deliver is a way for theater owners to right-size their portfolios and ramp up their results.