Marcus Corp (MCS) 2020 Q3 法說會逐字稿

Good morning, everyone, and welcome to the Marcus Corporation Third Quarter Earnings Conference Call. My name is Michelle, and I will be your operator for today. (Operator Instructions)

As a reminder, this conference is being recorded. Joining us today are Greg Marcus, President and Chief Executive Officer; and Doug Neis, Executive Vice President, Chief Financial Officer and Treasurer of the Marcus Corporation. At this time, I would like to turn the program over to Mr. Neis for his opening remarks. Please go ahead, sir.

Thank you, Michelle, and good morning, everybody. Welcome to our fiscal 2020 third quarter conference call. As usual, you do know that I need to begin by stating that we plan to make a number of forward-looking statements on our call today, all of which we intend to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act. Our forward-looking statements may generally be identified by our use of words such as we believe, anticipate, expect or words of similar import. Our forward-looking statements are subject to certain risks and uncertainties, which may cause our actual results to differ materially from those expected, including, but not limited, to the adverse effects of the COVID-19 pandemic on our theater and hotels and resorts businesses, results of operations, liquidity, cash flows, financial condition, access to credit markets and ability to service our existing and future indebtedness and the duration of the COVID-19 pandemic and related government restrictions and social distancing requirements and the level of customer demand following the relaxation of such requirements.

Our forward-looking statements are based upon our assumptions, which are based only upon currently available information, including assumptions about our ability to manage difficulties associated with or related to the COVID-19 pandemic, the assumption that our theater closures, hotel closures and restaurant closures are not expected to be permanent or for reoccur and the temporary and long-term effects of the COVID-19 pandemic on our business.

Listeners are cautioned not to place undue reliance on our forward-looking statements. Additional factors, risks and uncertainties, which could impact our ability to achieve our expectations identified in our forward-looking statements are included under the heading forward-looking statements in the press release we issued this morning, announcing our fiscal 2020 third quarter results. And in the Risk Factors section of our Form 10-Q that we're filing today, which you can access on the SEC's website. We'll also post our Regulation G disclosures when applicable on our website at www.marcuscorp.com.

With that behind us, let's begin. And we'll follow a similar format. I'm going to start by spending a few minutes briefly sharing a few numbers from our quarter with you, and I'll also discuss our balance sheet liquidity. I'll then turn the call over to Greg, who will focus his prepared remarks on where our businesses are today and what we're seeing for the near-term and longer future, and we'll then open the call up for questions.

You've seen the numbers, essentially, 100% of our theaters were closed for the first 2 months of the quarter. And the 80% that we reopened for the final month of the quarter, were only operating with a limited number of new films. As a result, after adjusting for nonrecurring items, including an impairment charge, our operating income and adjusted EBITDA from this division was pretty much equal to our second quarter results when we were completely closed. In the Hotels & Resorts segment, we had 4 hotels opened the entire third quarter and 3 hotels reopened during portions of the quarter, all as significantly reduced occupancies. While the numbers from this division weren't great, they were much better than the second quarter when we were essentially completely closed, and they were overall better than we had expected.

As the press release notes, we did once again have several nonrecurring items this quarter directly related to the impact of the COVID-19 pandemic. We incurred approximately $1.6 million of additional property closure and subsequent reopening expenses with the majority of the expenses in our Theater division. The reopening expenses this quarter related to extensive cleaning costs, supply purchases and employee training, among other items, related to the reopening of selected Theater & Hotel properties and implementing new operating protocols. We also incurred an impairment charge of nearly $800,000 this quarter related to several theater properties and an impairment charge of another $800,000 related to an investment in hotel joint venture. We included a non-GAAP reconciliation of our net loss and our adjusted EBITDA with our press release in order to show you the impact these nonrecurring items had on our reported results.

Our effective income tax rate was 26.9% during the third quarter and 37.3% for the first 3 quarters of the year. As we discussed last quarter, our year-to-date fiscal 2020 income tax benefit was favorably impacted by an adjustment of approximately $17.4 million, resulting from several accounting method changes and the March 27, 2020 signing of the Cares Act. One of the provisions of the Cares Act, specifically designed to help otherwise healthy tax paying companies like us that were significantly impacted by the COVID-19 pandemic, allows our 2019 and 2020 taxable losses to be carried back to prior fiscal years, during which our federal income tax rate was 35% compared to the current statutory federal income tax rate of 21%.

Excluding this favorable adjustment to income tax benefit, our effective income tax rate for the first 3 quarters of fiscal 2020 was 24.5%. We anticipate that our effective income tax rate for the remaining quarter of fiscal 2020 may be in the 28%, 29% range due to an expected taxable loss during fiscal 2020 that will continue to allow us to carry back a portion of the loss to years that had a 35% federal income tax rate. Of course, our actual fiscal 2020 effective income tax rate may be different from our estimated quarterly rates depending upon actual facts and circumstances.

Shifting gears away from the earnings statement just for a moment, our total cash capital expenditures during the first 3 quarters of fiscal 2020 totaled approximately $19 million compared to approximately $80 million last year. which included the cash component of the Movie Tavern acquisition. Most of this year's dollars were spent in our Theater division on several projects that we started during the first quarter. We only spent about $2.8 million during the third quarter. We continue to have most future capital expenditures on hold for the time being.

Now since the majority of our Theater & Hotel properties were open for at least a portions of the reported quarter, I'm going to provide some financial comments on our operations for the third quarter and first 3 quarters beginning with theaters. Now our overall attendance was down over 95% compared to the prior year third quarter because we were closed for 2 of the 3 months, attendance at comparable theaters, same theaters opened and same weeks opened, were down -- was down approximately 85%. Our average admission price at our comparable theaters during the weeks we were open, increased 0.6% during the third quarter and 2% for the first 3 quarters of fiscal 2020 compared to the prior year periods.

Our average admission price was unfavorably impacted by the fact that we continue to charge only $5 for older library film product, and we only apply our regular pricing to new films. We are very pleased to report an increase in our average concession and food and beverage revenues per person at our comparable theaters of 28% for the third quarter and 7.2% for the first 3 quarters of fiscal 2020.

Now our investments in nontraditional food and beverage outlets continue to contribute to higher per capita spending but there were other factors in the play this quarter that likely contributed to the large percentage increase. We've always believed that long lines at the concession stand can result in some customers choosing to skip the lines and not buy concessions. The reality is that with reduced attendance, lines are not long, and that has likely contributed to our higher per capita revenues.

We also believe that the emphasis we're placing on encouraging guests to purchase their concessions and food and beverage ahead of time either online or using our mobile app is also contributing to our increased per capita revenues.

While the first reason will eventually go away as attendance increases, the second reason has the potential to be long-lasting which is very encouraging. Finally, I'll point out that we were not able to compare our box office revenues limited as they were to the industry this quarter as data provided to Rentrak, the box office reporting service was also very limited and not useful for accurate comparisons.

Shifting to our Hotels & Resorts division, our total revenue per available room or RevPAR for our 7 comparable owned hotels for the third quarter and first 3 quarters decreased 58.2% during the third quarter and 44.3% during the first 3 quarters of fiscal 2020 compared to the last year's same periods.

Now to be clear, this math only includes the weeks that the various hotels were opened because, as I mentioned, 3 of our hotels were reopened for only portions of the fiscal 2020 third quarter. The Saint Kate was not opened during the third quarter at all, and thus was not included in these results.

Now according to data received from Smith Travel Research and compiled by us in order to compare our third fiscal quarter results, comparable upper upscale hotels throughout the United States experienced a decrease in RevPAR of 67.1% during our fiscal 2020 third quarter and were down 59.7% year-to-date. Meanwhile, competitive hotels in our collective markets experienced a decrease in RevPAR of 71.4% and 68%, respectively, during our third quarter in first 3 quarters. Thus, our hotels outperformed both the industry and our competitive sets during both the third quarter and first 3 quarters of fiscal 2020.

Breaking out the numbers for all 7 of our open hotels more specifically, our fiscal 2020 third quarter overall RevPAR decrease was due to an overall occupancy rate decrease of 46.4 percentage points and a 5.3% decrease in our average daily rate, or ADR. Year-to-date, our fiscal 2020 first 3 quarters overall RevPAR increase -- or decrease was due to an overall occupancy rate decrease of 28.6% -- 28.6 percentage points and a 10.2% decrease in our ADR.

Our third quarter occupancy rate for our 7 comparable hotels for the weeks that they were open was 36.6%.

Finally, before I turn the call over to Greg, let me also briefly comment on our balance sheet and liquidity position. I'll remind you once again that we entered this crisis from a position of strength. Our debt-to-capitalization ratio at the end of 2019 was a very modest 26%. Even after reporting the 2 worst quarters we've ever experienced in our 85-year history, our net debt-to-capitalization ratio at the end of the third quarter was still a very low 35%. Of course, we also own the underlying real estate for 7 of our company-owned hotels and the majority of our theaters, representing over 60% of our screens and even larger percentage of our revenues and cash flow, thereby reducing our monthly fixed lease payments. This is a significant advantage for our company relative to our peers, as it keeps our monthly fixed lease payments relatively low and provide significant underlying credit support for our balance sheet. We also shared with you last quarter that we filed our income tax refunds of $37.4 million in early August, with the primary benefit derived from the accounting method changes I have referenced earlier, and the new rules for qualified improvement property and net operating loss carrybacks that came out of the Cares Act.

I'm pleased to tell you that we've received approximately $31 million of those refunds in October after the end of the third quarter, with an additional $6 million expected soon.

We also expect to apply a significant portion of our anticipated tax loss to be incurred in fiscal 2020 to prior year income, which may also result in a refund that we expect may approximate $21 million in fiscal 2021, when our fiscal 2020 tax return is filed with possible tax loss carryforwards that may be used in future years as well.

You'll also note that we've begun reporting assets held for sale in our balance sheet primarily -- related primarily to the book value of surplus real estate that we believe will monetize during the next 12 months. Now we actually have significantly more real estate that we have the potential to monetize in the next 12 to 18 months. But our accounting policy is to only classify as assets for sale, the book value of assets that we actually have letters of intent or contracts to sell in place.

We'll continue to update this number on our balance sheet in future quarters as we make additional progress in our efforts to monetize surplus real estate. We're not going to speculate on what the possible sale proceeds might end up being, but has the potential to be in the tens of millions of dollars, depending upon the strength of the real estate market and how active we might choose to be. As we have previously reported, in light of the COVID-19 pandemic, we've been working to preserve cash and ensure sufficient liquidity to endure the impacts of the global crisis even if prolonged. As you know, on April 29, 2020, we amended our existing credit agreement and issued a new $90.8 million 364-day senior term loan A to further support our already strong balance sheet.

On September 22, we extended the maturity date of the term loan to September in 2021, amended our debt covenants and issued $100.05 million in convertible senior notes. We used a portion of the proceeds from this issuance to purchase capped call transactions that effectively increased the conversion rate of the convertible senior notes from 22.5% to 100%, significantly reducing potential dilution related to the convertibles.

Thus after deducting cost of the debt issuance, we added an additional $78.6 million in liquidity to our balance sheet. We used the net proceeds from the convertible issuance to pay down revolver borrowings under our credit agreement. As a result, as of September 24, 2020, we had cash and revolving credit availability of over $218 million, and that's not counting the $31 million of income tax refunds received in October. So you can do the math.

Our adjusted EBITDA during the second quarter, when we were essentially completely closed was a negative $30 million, and our adjusted EBITDA during the third quarter was a negative $26 million. Even when you add interest expense to that number, with a combined nearly $250 million in cash and revolving credit availability when you add in the October income tax refunds received, plus future income tax refunds remaining in 2020 and future perpetual income tax refunds in 2021, you can see why we indicate that we believe the additional financing positions us to continue to sustain our operations throughout fiscal 2021, even if our properties continue to generate significantly reduced revenues or have to reclose, for a period due to the effects of the COVID-19 pandemic. And we'll continue to pursue additional opportunities to fortify our balance sheet and reinforce our liquidity in the future. That will include seeking additional government support as appropriate, for example, we're very pleased to see the states of Wisconsin and Nebraska recently recognized the need to support those businesses most impacted by the pandemic and introduced grant programs that include the theater and hotel industries.

Our trade groups will continue to lobby for additional support at the federal level as well. With that, I'll now turn the call over to Greg.

Thanks, Doug. I'm going to begin my remarks where Doug left off. Discussing our balance sheet. This is my first chance to comment on the actions we took in late September to further strengthen our balance sheet and liquidity. And I think it will be helpful to explain our thinking. We have an 85-year history of prudently managing our balance sheet. As Doug shared earlier, we entered this crisis from a position of strength with a debt-to-capitalization ratio of 26%. That conservative approach to our balance sheet has proved to be particularly important during this current environment. We always have been and will continue to be thoughtful and opportunistic when managing our balance sheet.

Immediately upon the onset of the pandemic, we went to our banks and increased our liquidity via a 364-day term loan, closing on that financing in April 2020. With a significant number of unknowns in those first months of the pandemic, we believe adding this short-term borrowing was the prudent thing to do. While we now have the majority of our theaters and hotels open, there remains uncertainty regarding the pace of the recovery.

We continue to be confident that both our businesses will recover. But our thinking always has been and always will be long term-focused. With that long-term focus in mind, we also have always had the philosophy that our debt portfolio should match our asset base.

Our assets consist primarily of fixed and long lived assets. And thus, we've always tried to have a significant portion of our debt fixed and long as well. With the 364-day term loan scheduled to mature in April of '21, we are presented with an opportunity to amend our current bank agreements, extend our term loan by another 5 months and adjust our covenants to provide for future near-term and medium-term uncertainty in our businesses. A key component of amending our bank agreements was opportunistically raising attractive capital that would ultimately replace the short-term term loan. With that in mind, we believe the issuance of convertible unsecured notes was the most attractive capital raising alternative at that time, and had the following advantages. We can effectively replace short-term borrowings with 5-year junior capital. Five years is a long time and with minimal debt maturities before 2025, it has given us a lot of flexibility and time for the recovery to take hold. Cash interest payments will be significantly lower than other long-term options. We were able to size the issuance appropriately, particularly for a company our size. As an example, high yield debt, another long-term option many borrowers including some of our peers have availed themselves typically requires a minimum sizing in the $300 million range. By purchasing a cap call in conjunction with our issuance, we were able to effectively increase the strike price of the convertible from 22.5% of our closing stock price to 100% of our closing stock price, significantly reducing any dilution concerns that would typically arise from a convertible issuance.

In addition, we have the option to settle these notes at maturity with cash, equity or a combination thereof, providing the further ability to reduce any actual dilution of maturity. I think those last 2 points are particularly important and may not have been completely understood by the market. While we have the option of settling the convertible notes at maturity in any combination of cash and/or stock, it is our stated intent to settle the principal amount of the convertible notes in cash and only settle any of the in the money portion of the notes with stock.

Our capped call transactions effectively increased the strike price of the convertible notes to $17.98, $17.98, $18 almost, which significantly reduces the potential dilution arising from these notes. We have included a table in our latest investor presentation, which shows what the actual dilution would be depending upon our actual share price at maturity 5 years from now, building in the impact of the capped calls and the assumption that we pay the principal in cash. For example, at a $20 future stock price, dilution is estimated to be only approximately 3%. At a $25 future price, dilution climbs to a very modest 8.2% level. And if the price is higher than that while the dilution would increase, I think we would all agree that everyone would be pretty happy. You can find this presentation in the Investor Relations section of our website at www.marcuscorp.com.

You can be confident that we will continue to prudently manage our balance sheet in the future in order that not only will we come out of this current environment in a strong position, but that we will also be in a position to grow and thrive once more in the years ahead.

With that, I'll turn my attention to our operating businesses, focusing my remarks on where we are today, what we have done to date and are continuing to do to manage through this crisis and what some of our plans are for the future. As you can imagine, there are a lot of unknowns yet about what the future months will look like. So our plans will continue to evolve as the situation unfolds. I said this last quarter, but it is worth repeating. In this rapidly changing, truly unprecedented environment, there was one thing that has not changed and will not change. Our priority, as it has been throughout our history, is the safety and well-being of our associates, customers and communities. This has guided everything we have done so far and will guide us in the weeks and months ahead as well.

I continue to be thankful for our experienced and dedicated leadership team throughout our organization. They continue to work day and night, developing and executing strategies that we believe will get us through this crisis and put us in a strong position for continued growth over the long term. And as we have brought many of our associates back, they, too, have worked extremely hard under very difficult circumstances in order to continue to provide an outstanding experience for our guests. I am so proud of each and every one of our associates.

So let's start with our hotels since they are further along in the reopening process. Doug shared some of the numbers with you, including the fact that the data suggests we outperformed both the industry and our competitive sets this quarter. It certainly wasn't a good quarter from any historical sense. But frankly, it was better than we expected when we first started reopening our hotels with very little advanced bookings in place. As our press release notes, the vast majority of our customers this quarter came from the drive-to-leisure market. It wasn't that we didn't have any group business. As the summer unfolded, we did have weddings at several locations and the return of Major League Baseball helped our Pfister hotel. But the majority of our customers were transient leisure customers who are just looking to get away and change their scenary after months of staying home. As a result, not surprising, weekend business was the strongest in properties like the Grand Geneva Resort & Spa and Timber Ridge Lodge performed the best among our hotels as they are well suited for families looking to get away.

Golf revenues at the Grand Geneva, for example, were actually higher than they were last year. And overall, 37% occupancy rate is nothing to get too excited about compared to what we are used to during our third quarter. But it certainly justified our decision to reopen our hotels. As we shared with you last quarter, in many ways, reopening our hotels was a mathematical exercise. We made the bet, we'd be better off open than closed and it proved to be a good bet. We were particularly pleased that our ADR held relatively strong during the quarter. Admittedly, it's hard not to wonder what the quarter might have been like in a non-COVID world with the Democratic National Convention and the Ryder Cup, but it was not to be.

It also is important to note that the customer response to our new operating protocols has been very positive. Once again, I can't say enough about the wonderful job all our hotel associates have done as we welcome guests back to our properties.

We're also particularly pleased with our recent announcement that Saint Kate the Arts Hotel is reopening this week. We had reopened the first floor common areas, including the bar and Pizza restaurant in late July, and now we're reopening the rooms. This amazing hotel has earned an incredible number of awards since it opened last summer, including most recently being named the #6 top hotel in the Midwest and the top hotel of Milwaukee by Condé Nast readers. It is fair to say it is now Milwaukee's most recognized hotel with the Saint Kate reopening, all 8 of our company-owned hotels will be open.

Looking to future periods, overall occupancy in the U.S. has slowed -- has slowly increased since the initial onset of the COVID-19 pandemic in March. Higher end hotels, like the ones we generally operate have been impacted more than lower end hotels. Most current demand continues to come from the drive-to-leisure segment. Most organizations implemented travel bands at the onset of the pandemic and are currently only allowing essential travel, which will likely limit business travel in the near term. Our company-owned hotels have experienced a significant decrease in group bookings for the remainder of fiscal 2020 compared to the same period last year.

As of the date of this report, our group room revenue bookings for fiscal 2021, commonly referred to in the Hotels & Resorts industry as group pace is running significantly behind where we were last year at this time for fiscal 2020. And a large portion of that decline is because last year's group bookings included bookings in anticipation of Milwaukee hosting the DNC, Democratic National Convention in July 2020.

Banquet and catering revenue pace for fiscal 2021 is also running behind where we were last year at this time for fiscal 2020, but not as much as group room revenues due in part to increases in wedding bookings.

Many of our canceled group bookings due to COVID-19 are rebooking for future dates, excluding onetime events that could not rebook for future dates, such as those connected to the DNC. However, some group bookings for the first half of fiscal 2021 have subsequently canceled or postponed their event, and we cannot predict to what extent any of our hotel bookings will be canceled or rescheduled due to COVID-19 or otherwise.

We were pleased to see the Ryder Cup rescheduled for 2021, and it is contributing to our 2021 group pace. Looking further out, the Wisconsin District just approved financing for the expansion of its convention center here in Milwaukee. The expansion is currently expected to be completed in late 23 -- 2023 or early 2024.

Forecasting about future RevPAR growth or decline will be during the next 18 to 24 months is very difficult at this time. The non-group booking arrival is very short with most bookings occurring within 3 days of arrival, making even short-term forecasts of future RevPAR growth very difficult. Hotel revenues have historically tracked very closely with traditional macroeconomic statistics such as the gross domestic product. So we will be monitoring the economic environment very closely. After past shocks to the system, such as 9/11 and the 2008 financial crisis, hotel demand took longer to recover than other components of the economy. Conversely, we now anticipate that hotel supply growth will be limited for the foreseeable future, which can be beneficial for our existing hotels. Most industry experts believe the pace of recovery will be steady but relatively slow. We continue to believe it will be very important to have our marketing message focused on the health and safety of our associates and guests.

Overall, we generally expect our revenue trends to track or exceed the overall industry trends for our segment of the industry, particularly in our respective markets. Regardless of how this unfolds, I'm confident that our Hotel division President, Michael Evans, and his outstanding team will effectively manage our hotel operations during these turbulent times. Our associates are working tirelessly so that every guest can rest easy knowing that they are receiving the highest standards of service and cleanliness, while still enjoying the best, our award-winning hotels and resorts have to offer.

So let's shift to our Theater division. Doug went over the numbers with you. And since we were closed for the majority of the quarter, the numbers were pretty similar to the second quarter, obviously, challenging. In the midst of this unique time, however, there were some encouraging signs during the quarter that bode well for us in future periods. First off, we're thrilled with our customer reaction to the new protocols we put in place. To get 96% of a group of people to agree on anything is virtually impossible these days, if that is what percentage of our first loyalty members told us they had a safe and comfortable experience at our theaters. All the credit goes to our leadership team for developing smart and effective new operating protocols and to our managers and theater associates for executing on them and providing a great experience for our guests.

We expect policies and guidelines will continue to evolve with time and will be assessed and updated on an ongoing basis. Our goal continues to be to build consumer confidence and trust as quickly as possible. We know it is a process, but word-of-mouth will help, and we're off to a good start. We also didn't know for sure what customers' behavior would -- what customer behavior would be once they arrived, would they adapt to the new protocols. Would they use our industry-leading technology to order more of their concessions in food and beverage online? Would they even buy concessions? The answer to these questions was a resounding yes, and were very pleased with the increases we experienced in our concession revenues per person.

As our press release has noted, we reopened 80% of our theaters by August 28 in time for several new films, including Tenet on Labor Day weekend. Unfortunately, with restrictions still in place in New York and California, in particular, not long afterwards, studios started changing the new release schedule once again. Thus, like I mentioned in my hotel remarks, it once again became a little bit of a math exercise. We want to be open, but being open has a certain level of fixed cost associated with it. So we also don't want to lose more money being open than closed.

As a result, we made the difficult decision to reclose 17 theaters in early October and reduced our operating hours and operating days at our remaining open theaters. Right now, our theaters are open on Tuesdays, Fridays, Saturdays and Sundays, which better aligns with current demand. The industry received some good news a couple of weeks ago when it was announced that New York state would begin reopening theaters. That allowed us to reopen our movie theater -- our Movie Tavern location in Syracuse. And as an indication of pent-up demand, that location was the #1 theater in the country for the new film Honest Thief when it first reopened. We since reopened 3 theaters in Nebraska as well, meaning that as I speak to you today, we have 59 theaters open, representing approximately 66% of our circuit.

So now it really comes down to 2 interrelated topics, both necessary to increase customer demand for going to the movies. First and foremost, we need new films to be released. We've seen firsthand that when new films come out, our attendance increases. And in fact, when we pulled our guests, our loyalty club, 60% of them said the reason they weren't coming was because there was -- there were no movies to see. Attendance in the last couple of weeks has been the best we've experienced since the first 2 weeks of reopening and is not a coincidence that they coincide with the fact that we are showing an increased number of new films as well as an increased variety of films shown. We do best when all the film genres are represented.

We continue to have regular conversations with all our studio partners regarding the need for them to commit to film release dates and continue to release new films theatrically. Having said that, we also need the country on an incremental basis to get the pandemic under control. Not only will that increase consumer willingness to go to the movies. But it will further encourage the studios to follow through and release their films with confidence that there will be a willing audience ready to attend and see their content the way it was meant to be seen.

It is particularly heartening to take a look at what is going on in Asia. The Chinese box office is coming back. In a recent new release in Japan just shattered the record for the biggest opening in Japanese history after initially struggling to attract audiences. It was an anime film. It did $44 million in its first weekend that compared, to give you an idea of the relative performance to Frozen 2, which did $30 million. So it was a significant outperformance. There are multiple films still scheduled to be released during the remaining 2 months of the year that may generate substantial box office interest. We've listed some of those films in our press release. The anticipated film slate for 2021, which will also now include multiple films originally scheduled for 2020 is currently expected to be very strong. And despite some continued experimentation with alternative releasing strategies, which we believe are generally directly related to the current COVID-19 environment, the fact remains that the vast majority of films have been delayed to future periods. A clear indication in our view of the importance of the theatric experience is the studios as they seek to monetize their content.

Just as we've had to adapt our plans in the recent months, we've recognized that we will need to be prepared for new challenges and opportunities in the weeks and months ahead. While I won't share the exact numbers.

When we first began reopening theaters, we did the math, and we believed, we needed a certain attendance level in order to perform better than being closed. As we've managed through the past 2 months, we found additional ways to reduce fixed costs and operate at lower levels of attendance. In other words, our math has improved, and we have 66% of our theaters open today because we think it is better to be open, better for the customer's sake, better for the associate's sake and better for the overall business sake. And of course, we have an advantage that Doug alluded to earlier. We own the majority of our theaters, reducing our monthly fixed costs and making it easier for us to stay open.

There's always the possibility that the film schedule could change again or that we could see renewed restrictions from select local or state jurisdictions. But I am certain that Rolando Rodriguez and his incredibly talented team will be prepared to adapt and manage us through this reopening process and ultimately position us to, once, again, lead the industry into what we believe will be a very bright future. And while I'm on it, I want to publicly congratulate Rolando on recently being elected Chairman of the Board for our industry trade group, the National Association of Theater Owners, or NATO. It is a tremendous honor for Rolando and a recognition for his leadership, not only for us but for the entire industry.

In conclusion, in this continually changing environment, you can rest assured that we are constantly reviewing the situation in both our businesses and making changes to our plans as warranted. Our company is built for challenging times like this. Our leadership team, managers and associates have stepped up to the challenge in ways that go way above and beyond. And for that, we are most grateful. We also continue to appreciate the confidence and support of our lenders in the investment community during this challenging time and always. With that, at this time, Doug and I would be happy to open the call up for any questions you may have.

(Operator Instructions)

We'll go to our first question from Eric Wold with B. Riley Securities.

A couple of questions, I guess, 1 on the theaters and 1 on the hotel side. Greg, you just mentioned about the theaters, that you identified certain fixed cost side that you can reduce to bring down that breakeven point? I know you're not going to say what that breakeven point is. But can you at least identify what those fixed costs were? Are those more likely to be short-term or can they be permanent?

It's -- let's remember, breakeven to being closed. So let's just make sure that we're just talking about the same thing.

Yes.

The -- it's -- look, they're looking at everything throughout the Board. First of all, just -- and some of it's when I say temporary, some of the costs were temporary. We've -- to get people, for example, to get people accustomed to the environment, we were a little -- we were, I would say, heavy on some of the labor to get people to -- we had greeters, people to show people, okay, how do you operate in this new environment? I mean, literally, I mean, to tell you how detailed we were and our team was, and I give them such credit, we were -- you could use your foot to open the door because we've got these little pedals that sort of sit on the bottom of the door, that it's like a clamp. And when you put your foot down on it, you can pull the door up on your foot. You don't have to touch the door. I mean it's that level of detail. So to have people -- and to explain how to order online and order your tickets online and to promote that. So some of that then got cut back. That was a piece of it. And then just adjusting to the -- we're going to adjust to what the volume is in the theater with our processes. And then also, but it's throughout the organization. We've asked our teams at the corporate level to cut back as well. And to be -- we've been very thoughtful about every dollar that we spend, and it hasn't been easy. And again, to Rolando and the team, I thank them. This has been a huge challenge. This is -- they exemplify what leadership is. And so some of that, look, it's -- as we train to run the marathon, we've gotten in better shape, and I think some of that will be permanent in the end and how we operate. And I do think, again, too, one of the advantages of the ability to move people to online ordering, something we learned a long time this is a benefit of being a multiple business lines, of being in the hotel business. I heard it many years ago, and they talked about how getting customers to make their own reservations in hotels, which you now do on your phone and on your computer, was a huge benefit because it saves them a ton of money from them. I'm going to call up for reservation center where a human had to do that. We --they actually moved the work to the customer as opposed to someone they employed to do that. Same thing in the theaters, if you can get people to order tickets online and to order their concessions online, although it's a very quick transaction to type in somebody's order, you put in thousands of transactions and those -- that time adds up. And so I think that there will be savings that come throughout that we see at the other side of this. As I said, it's a mixture of things.

And now on the hotel side, can you talk about the decision to reopen Saint Kate's rooms something we -- and I know in the past, you talked about -- you only opened a hotel if it was -- if it would lose less cash or generate more cash than being closed, is that the case here without potentially drawing away from the 2 other properties in Milwaukee? Or is this more a move kind of just to prime that property, get it ready for when business has returned?

I think you read my mind exactly, Eric, it was -- you are exactly on point too. It's -- I don't know how -- we don't know how -- because we don't -- there's no advanced bookings. We've had so many -- this is such a special hotel. It's so interesting. I mean to the -- and I go back to when we first opened the Saint Kate, we were trying -- I went out on Google, and we were getting here and oh, man, this hotel is fantastic. It's so unique and so interesting and so amazing. And so I go on Google and I Googled best hotels in Milwaukee, and it wouldn't show up, and I was like, oh, we just haven't been around long enough to be on the list. Well, now we're on the list. And that Condé Nast award was such a -- I thought it's such an important award among all the others. We've gotten just so many -- we're one of the most recognized hotel of Milwaukie, for sure, and frankly, probably one of the more recognized hotels in the country if you sort of add it up. That we thought it was important to have rooms open. And one of the advantages of being in Milwaukee is we're able to lever some management across the hotels. And so the incremental cost of being open isn't very much, we may shift a little bit of business, I think you're exactly right about that. But we want to be able -- it's hard to tout, you're one of the best hotels in town and then not be available to guests.

Got it. And then just a last question on the hotels. What are you seeing with competitive ADRs in the markets you're in? And then what have you done in response to those? Are you being flexible at all? Or are you mostly really holding your own?

I would -- it's market-dependent. And ADRs are down in lots of places. Where we could, where there's demand, we were able to hold ADRs in some areas as well. And so it just depends on what's going on and mix of business, and we've shifted business and different -- we've got some lower-rated business that we moved around. So -- I would say, I'd give it a B on -- in terms of people not going completely to racing to the bottom because they know that there's not a lot of -- there's probably not a ton of elasticity. They want to attract people, but people that are traveling are just going to travel. So.

And our next question comes from the line of Jim Goss with Barrington Research.

Over the past several years, I felt the industry -- the theatrical industry has addressed the footprint issue by cutting seats with reseating rather than fewer screens. At this stage with the pandemic contributing, do you think there will be any cut in the number of screens in the industry? And if so, how would you look at the impact potentially on your competitive position or even your M&A potential, given that you're in a lot of smaller markets where maybe some of those theaters might be more at risk?

Well, I do think, Jim, there will be a shrinking of the theater footprint. I think that the odds are that there will be players who will have to reorganize. And it's interesting. I think it's important for people to remember, reorganization doesn't mean they're going away. Again, you got to take a little bit more than a 14-second outlook. And it's hard for the average lay person understand that I know you understand that.

But as a company, they reorganize, they're -- frankly, the investors are already in there. They've been jocking for position in their debt for months and months and months. If they're waiting for the loan, they've been loaning to own. They're going to end up owning these, and they're going to end. And then if you look -- believe in the long-term health of the business, which I do, I believe people want to be together, people want to go to the movies, they're itching to get out right now. I think it's the -- we know that theatrical is a significant revenue stream for a lot of these companies.

Frankly, societally, I think it's important. I mean, we always talk about the communal experience, and we do -- we talk about it being good for our -- being good because customers enjoy being with other people. But even beyond that, a society, is only strong as its common bonds of trust. And I somehow think that society would prefer to have people of different backgrounds and thoughts altogether in a room rather than sitting at home alone in their silo, thinking about just what they believe. And so I think societally, it's good.

So I believe, again, in the long run, the future of theatrical. But that being said, as they rationalize their footprints, some of these smaller theaters will go away.

Now look in the small towns that we're in, probably we may be the only player in a small town. Now we're a competitor with a less -- a theater -- let's say, we didn't invest in these theaters. It's time for them to go away.

They give them back to the landlord. Nobody comes back in to take them. The landlords and the -- some of these obsolete theaters go away, a customer who want to come to theater will travel further and they'll probably come to some of our theaters. So that will be helpful in the long run as well.

As for bigger theaters, frankly, we've been thinking for a long time about if we had too many screens then what are other uses for them? What other kinds of group uses could there be? And I don't know where that will happen as well, but there'll be some of that. And in markets where there's been some overbuilding, some of those theaters are going to disappear. And then the people who are still around will benefit from those customers, as we've seen in lots of industries. We think about the car industry in the Great Recession, and I always call the not so Great Recession, the guys who were able to get through it ended up really doing very well because there was a thinning out of a lot of car dealers. And so I don't know that it will be as dramatic as that with our industry, but I think there will be some of that.

Okay, so the overall number, the 40,000 or 42,000, whatever the figure is, right now, you don't think will materially change?

No, no, I do think it's going to decline. I do think it will decline. I can't put my finger on what it will be. But I do think it will shrink.

But Jim, let me just make one other point on that. No one should draw a percentage of revenue to theaters as a straight-line depreciation -- as a straight-line mathematical exercise. If a certain percentage of those theaters go away, it's a very probably small percentage of overall revenue because they're those smaller obsolete theaters.

That's a good point, too. Yesterday, you had an announcement of maybe an increased link with Comscore. I wondered if you could talk about that a little bit? Are you somewhat outsourcing some of your theater management operations or just engaging them and certain aspects that they do maybe to a greater extent? I'm just wondering how this -- how we should read into this announcement that you made...

I think Comscore wanted to promote that we were their customer.

Okay. Fair enough.

Jim, they've got a very good product that we use at the theater level, theater management system. And so that's what it is. I don't think there's any larger issue other than it's a very good technology that we were pleased to continue to use and expand our usage of.

Okay, and maybe lastly, the surplus real estate issue you mentioned, and you said potentially tens of millions of dollars, that sort of thing, what would be the decision driver in doing something with regard to some of this real estate? And might there be property swaps that might benefit you, the hotel or theater side that you might consider rather than monetizing them directly?

Well, I would break the -- 2 things, one is going to be demand. We -- the -- because we're not -- we're not -- we don't have to fire sale these properties. Again, that's the most important point. It's really got something where, frankly, just it was good to get our focus on what we had there. And so that focus now has really get us as you said, let's make sure that we maximize we've got going on.

That being said, we don't need to -- we don't need to fire sale it to anybody. And so -- but the increased focus, the devotion -- taking our resources and devoting and making that happen is I do believe important. Now that surplus real estate, it's not something we would trade.

Now would we trade real estate? Yes, sure. In certain markets, if it made sense, we would be open to that. There's nothing of that happening right this second. And I don't think until the world settles down when stuff like that happened, but it's not unheard of.

No. Typically, there's a tax ramification if you do a property swap. And -- are both the hotel and the theatrical parts of your business in the same area in terms of that tax issue?

Real estate is real estate when it comes to that particular issue, Jim. So yes, if you sell real estate and buy real estate essentially, I mean, the trade is you're kind of referring it to, then it does -- you got to do it right, but you've to meet certain qualifications. But yes, it does ultimately qualify for the 1031 treatment that you I think you're referring to.

(Operator Instructions)

Our next question comes from the line of Mike Hickey with the Benchmark Company.

Greg, Doug. I guess congrats on the hotel side for the quarter, definitely, pretty good performance, it makes sense to be open. But looking at fourth quarter, it looks like sort of the virus influence sort of crept up in some of the states where you have concentration of some of your business units, Wisconsin, in particular, where you own 5 of your hotels. And I think your screen count is around 27%. So just curious what you're seeing in the fourth quarter in terms of sort of consumer behavior under sort of that spike in infections that you're seeing in Wisconsin and other key states?

Well, it's been a little hard to tell right now what's -- look at it, I think -- look, we -- our businesses would typically slow down in the fourth quarter. Hard to know. I mean, it's interesting. I looked at -- I can -- I would say, which -- I looked at the list yesterday of some of our theaters and how they were doing, I looked individually on the tenants level. And I thought -- looked at some of the areas that have been the hardest hit. And yet those theaters are not necessarily among the lowest performing theaters. You think there would be a natural correlation to that. At the end of the day, it does talk about on the feeder side about what people feel is of all the indoor things that could be going on, that theaters are among the safest things and all the indoor because of the nature of what you do, doesn't -- it doesn't intuitively feel that way until you think about it.

And we've talked about this before, but the intuition is theater, concert, live theater, they sort of all go to that direction. Would you go out to eat? Oh, sure, I go out to eat, someone would say. But in a restaurant and done properly restaurants can be safe environments, too, but just don't know if you're going to compare relative environments.

Now theater, you go in, you don't -- you face all one direction. You don't talk to anybody. You don't -- you have a mask on, unless you're going to have some concessions. You're socially distant from everybody, the fact that we have recliners, keeps you 7 feet deep between seats and we see checkerboard and you have 6 feet between you and the people to your side. So because of all these things that we've -- that you order online, the low-to-no contact, all the things that we've been putting in place, it's -- and people are learning about it. The people that are interested are starting to hear you know it's -- they're feeling a comfortable and safe environment. And as I said, our customers are -- it's helpful to have that. And so again, more product would be -- cause more people to talk about it.

But yes, no, I mean, I think that we have to be sensitive to what might happen with the virus and what's going on. And -- but I do think that if they do start to -- that there will be attention focused on it post election. And hopefully, then it's a short intense attack at what's going on and then -- because we've learned from experience, and then we we get the control and start to move back and go a better place.

Did you mention what you're seeing in the hotels in terms of sort of recent trends on the virus or I miss that? Sorry, if I missed a couple of things.

Again, I think it's still sort of hard for us to tell. I didn't really talk about because we're seeing is pretty -- it's been what we've been seeing sort of all fall, which is it gets relatively quiet during the week. And it's again, the person driving this is the -- is consumer leisure and then it gets stronger during the weekends. And, for example, like Geneva right now, we're in a bit of a lull because again, hard to tell, well it was Halloween, so that's one thing and that's going -- can't look at one weekend, but even more generally, we're sort of in between golf and before ski season. And so -- but once we get some snow and get some skiing and it gets colder and it's starting to get colder, except for this week, that should be good for Lake Geneva on the weekends.

And so again, I do think that as the heats up, it's fair to say, let's watch what's going on. We don't have any insight to it yet, but it's a fair concern. But again, I think that it will get attacked. And then we'll get moving again.

On the leisure side, I mean, normally, your fourth quarter and first quarter, I think, are sort of low occupancy quarters just given the lovely winners you have there, Wisconsin. The -- but do you think it might be different over the next couple of quarters, just given how constrained our summer months have been. And are you doing -- I know you're pretty creative like Geneva and other properties in terms of promotions and special offers, are you doing any sort of incentives that could bring people on the leisure side more than normal in the fourth quarter and first quarter?

Yes. Our teams have been -- I give them such credit, Michael and the team, they've been unbelievably responsive, they're trying to come with ideas for how to drive it, look it. I think even as you -- we're all seeing. This is -- we're not in a great period. We're trying to just make the best of what we have here. We're trying to make a little lemonade.

And so I'm not sure the dial is going to get moved generally huge in either direction. But that being said, they've -- we've been working on promotion -- like this week, all of a sudden, it's 60 here, and they're very quickly getting out to market to people, hey, come play golf, the weather is beautiful. And so they move very quickly on it. But other things marketing it as a quick getaway, marketing staycations, marketing, the idea of -- if your kids are remote, if you -- or if you're remote, if everything you're doing is remote, come and stay at our hotels, come in -- because -- and we've set up like Lake Geneva, we've got the ability to help them with learnings, set up for tutoring and to take advantage and say, if you're stuck at home and you can't -- and nobody is going anywhere, you may as well come and have a change of environment and come to where we are and come to have -- come to where you can be outdoors and enjoy all the amenities that we have that you can enjoy safely.

So the team has been very creative in coming up with ideas to try and take care of -- to do just that.

The last question, you touched on it a bit, but it looks like you had at least one distressed seller potentially in the market in the U.S. on the theater side, I'm sure there's a lot of them. And of course, when is that obvious, you usually get a pretty good discount in the asset. Just sort of wondering your motivation to be a buyer here, or is it just still too uncertain for operating environment to be opportunistic?

I think it's going to depend on the situation. There's nothing right this second. I think some of the opportunity for a company like ours will be in -- as people are rationalizing their footprints, to potentially pick up theaters from -- with landlords and cut deals that are -- that look different than we've been cutting in the past to say, look at landlord, you might be getting offered something very low, we would be able to come in and maybe we're going to be partners. We've done deals with that. In fact, if you go back in the history of the company, which, by the way, it's our 85th anniversary, we celebrated it on Sunday or we celebrated this week. But my grandfather, I know one of the ways he built the business after TV came along. So let's talk about the fact that this business does endure some significant shocks. That the -- and it endures keyword being endure. He went around to people who were getting theaters back and saying, look, we're going to be partners, and we'll bring -- and because it's going to come back at some level, and he was right. And so I think there could be opportunities like that as we look forward, and we will be focused on trying to take care of do that. And then looking at other opportunities with people who own things who need good management teams. We have that. We certainly -- that we have a great team that understands this business.

Thank you. At this time, it appears there are no other questions. I'd like to turn the call back to Mr. Neis for any additional or closing comment.

Well, thank you, everybody. Thank you for joining us once again today. We do look forward to talking to you once again in early 2021 when we release our fiscal 2020 fourth quarter and year-end results. Until then, thank you. Have a great day.

That concludes today's call. You may disconnect your line at any time. Ladies and gentlemen, have a good day.