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Text: We'll also post our Regulation G disclosures when applicable on our website at www.
So, with that behind us, let's begin, and I'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.
You've seen the numbers, essentially 100% of our theaters were closed for the first two months of the quarter and the 80% that we reopened for the final month of the quarter, we're only operating with a limited number of new films.
As a result, after adjusting for non-recurring 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 Hotels & Resorts segment, we had four hotels opened in the entire third quarter and three 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'd expected.
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.
Our effective income tax rate was 26.9% during the third quarter and 37.3% for the first three 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 COVDI-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 three quarters of fiscal 2020 was 24.5%.
We anticipate that our effective income tax rate for the remaining quarter 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 for 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 three 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 the 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 three quarters beginning with theaters.
Now our overall attendance was down over 95% compared to the prior year third quarter because we were closed for two of the three months, attendance at comparable theaters, same theaters opened and same weeks opened, was down approximately 85%.
Our average admission price at our comparable theaters during the weeks we were opened increased 0.6% during the third quarter and 2% for the first three quarters of fiscal 2020 compared to the prior year period.
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 three quarters of fiscal 2020.
Now our investments in non-traditional 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 the skip the lines and that by 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 are placing an 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 is the potential will 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 seven comparable owned hotels for the third quarter and first three quarters decreased 58.2% during the third quarter and 44.3% during the first three 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 three of our hotels were reopened for only portions of 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 the data received from Smith Travel Research and compiled by us in order to compare our 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 and first three quarters.
Thus our hotels outperformed both the industry and our competitive sets during both the third quarter and first three quarters of fiscal 2020.
Breaking out the numbers for all seven of our open hotels more specifically, our fiscal 2020 third quarter overall RevPAR decreased 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 three 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 seven comparable hotels for the weeks that they were opened was 36.6%.
I will 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 two 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 seven of our company-owned hotels in 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 referenced earlier.
And the new rules for qualified improvement property and net operating loss carry bags 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 carry-forwards that may be used in future years as well.
You'll also note that we begun reporting assets held for sale on our balance sheet, primarily -- related primarily to the book value of surplus real estate that we believe will monetized during the next 12 months now.
Now we actually have significantly more real estate that we have the potential to monetize in the next 12 months 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 in 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 as 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 increase 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 use 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 potential 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.
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 would 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.
But we now have the majority of our theaters and hotels opened, 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 with 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 21, we are presented with an opportunity to amend our current bank agreements, extend our term loan by another five 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 five-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 of typically requires a minimum sizing $300 million range.
But purchasing the 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 two 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 intend 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 -- $18 almost which significantly reduces the potential dilution arising from these notes.
For example, at a $20 future stock price dilution is estimated to be only approximately 3% and a $25 future price dilution claims 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 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 and 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 is 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 is guided everything we've done so far and will guide us in the weeks and months ahead as well.
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.
It wasn't that we didn't have any group business.
As the summer unfolded, we did have weddings at several locations and return of Major League Baseball helped our Pfister hotel.
But the majority of our customers were transient leisure customers, who were just looking to get away and change their scenary after months of staying home.
As a result, not surprising, week end business was the strongest and properties like the 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's 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 opened and closed and 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 non-COVID world with the Democratic National Convention in 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.
We're also particularly pleased with our recent announcement that Saint Kate-The Arts Hotel is reopening this week.
We 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 is earned an incredible number of awards since it opened last summer, including most recently being named the number six top hotel in the Midwest and the top hotel in Milwaukee, by Conde Nast Readers.
It's fair to say, it is Milwaukee's most recognized hotel, with the Saint Kate reopening all eight of our company-owned hotels will be opened.
Looking to future periods, overall occupancy in the US has slowed -- has slowly increased since the initial onset of the COVID-19 pandemic in March.
Higher and 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 implement to travel bans at the onset of the pandemic, and are currently only allowing the 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 revenue is due in part to increases in weeding bookings.
Many of our canceled group bookings due to COVID-19 are rebookings for future dates.
Excluding one-time events that could not rebooked 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 what future RevPAR growth or decline will be during the next 18 months to 24 months is very difficult at this time.
The non-group booking arrival is very short, with most bookings occurring within three days of arrival, making even short-term forecast 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 focus 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 am confident that 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 are 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 the 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 -- 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 and food and beverage online, would they even by concessions?
The answer to these questions was a resounding, yes.
And we were very pleased with the increases we experienced in our concession revenues per person.
Unfortunately, with restriction 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 costs associated with it.
So we also don't want to lose more money being opened and 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 the New York State would begin reopening theaters, that allowed us to reopen our movie theater -- our Movie Tavern locations in Syracuse.
And as an indication of pent-up demand that location was the number one theater in the country for the new film Honest Thief when it first reopened.
We've since reopened three theaters in Nebraska as well meaning that as I speak to you today, 59 theaters opened representing approximately 66% of our circuit.
So now it really comes down to two 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 first-hand 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 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 two 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.
And 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 two months of the year that may generate substantial box office interest.
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 -- are generally directly related to the current COVID-19 environment, the fact remains, the vast majority of films have been delayed to future periods.
Clear indication in our view of the importance of the theatrical experience for the studios they seek to monetize their content.
Just as we've had to adapt our plans in the recent months, we recognized that we will need to be prepared for new challenges and opportunities in the weeks and months ahead.
Well, 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 manage through the past few months, we found additional ways to reduce fixed cost and operate at lower levels of attendance.
In other words, our math has improved and we have 66% of our theaters opened today because we think it is better to be open, better for the customer sake, better for the associates 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 opened.
There is always the possibility of the film's 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.
A company is built for challenging times like this.
Our leadership team, managers and associates are 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 will be happy to open the call up for any questions you may have.

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marcus theatres temporarily closed 17 previously reopened theatres in early october due to lack of new film releases.

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