By David Shakirov
There was a time decades ago, when going to the movies was a spectacular affair. Forget cramped seats, with years-old popcorn stuck in-between its cheap, polyester cloth. Or the overpriced, low quality food offerings. Nowadays, the movie theatres themselves are normally wildly empty — industry insiders cite a capacity utilization rate in the teens %. No, this is not a piece on why, or how, Netflix became a $140B company. It is, however, a speculative tale of a theatre company trying to change an otherwise boring and slowly bleeding industry. What’s in its way? The Retirement System of Alabama, of course. That is, this article will try to explore the relationship between the RSA, a $44B pension fund, and iPic, a luxury dine-in movie theatre concept that found the wrong partner in its capital intensive crusade for selling movie-goers reclining chairs, martinis and lobster rolls.
In a 2015 interview, AMC’s CFO Craig Ramsey acknowledged that the industry is slowly suffering. He noted how movie theatres, unlike most other businesses, only operate at an 11% capacity, and how, by expanding and improving its seat offerings (and increasing the ticket prices), the number of attendees grew by close to 50%. It was years before Ramsey’s realization that Hamid Hashemi was slowly developing the luxury dine-in theatre concept. Out of this came “iPic”: a concept that rapidly decreased seats per square foot, expanded the size and comfort of each seat, increased the price 2-3x, and sold restaurant quality food and booze during the film screening. The business grew, opening locations across the nation in high end neighborhoods, throwing expensive, celebrity filled launch parties, and inviting “mixologists” and chefs to populate the kitchens. While AMC struggled with $460k of annual revenues per screen, iPic enjoyed $1.65m of per screen on its most luxurious offering
At a glance, iPic seems like a ripe growth story. Inorganically, iPic wants to grow via expansion. They operate 14 theatres, with plans for 43 by 2025, and over 250 in the long run. They also want to capture 13% of the Saudi movie market after acquiring rights to open there. Each opening is financed through a long term lease, with total debt reaching average levels of $11m/theatre. In year three, iPic sees roughly 25% unlevered free cash flow returns on a new theatre, enough to pay back debtholders, and hopefully, with scale, cover its cost of goods and corporate overhead.
Organic growth is major, as well. This year, iPic plans to revamp its movie theatres to include almost 100% high end seats (think not “premium” but “premium plus”). Why? Because it found that customers prefer the more expensive offerings 4:1 to the cheaper ones. iPic gets 60% higher ticket revenues from its already high-priced tickets, and patrons spend 80% more, on average, on food and booze (win-win). Also, it’s expanding the revenue stream to include other sources, including high end advertising revenues (given its target demographic), alternative theatre revenues (renting out theatres for gaming events, for instance), etc. Overall, it’s revenue per guest is up 25% since the beginning of 2015. Even with disruptions in its theatres (during renovations) and a slow movie market in general, iPic has seen a high teen revenue growth CAGR and a 10-12% store level EBITDA margin.
Actually, its store level numbers and gross margins looked pretty good. Its unlevered returns were not bad either (again, coming in at 25%). These were the statistics that management, on its investor presentations that have since been taken down, emphasized. What these numbers fail to highlight though, is the massive debt load of the company, and its toxic corporate overhead. These two have drawn the company deep into the red, at around -25% of revenues, bottom line. As iPic’s revenues swelled from $98m in 2015 to nearly $150m in 2018, its corporate overhead doubled, along with its “other expenses” (a line item for maintenance and miscellaneous costs). These two line items alone have continuously drawn the company into the negative, excluding the interest payments (15% of revenues) on its debt.
Maybe it’s the CEO/Founder/President/Chairman’s (all the same person) $5m pay package (with cash compensation actually increasing from 2017 to 2018 as the business bled harder and harder), or the company secretary’s $3.7 comp + equity. In total for 2018, the company cites $9.4m in relation to equity-based comp. I’m not attacking a system that incentivizes executives to perform through equity-pay, but raising the point given how much overhead the company sees (why not cut the pay in half, and given the company’s proposed and believable rapid growth, have the execs put their own cash into the stock? With the stock down 90% in one year, the equity-based incentive to operate the company efficiently did not work as planned…)
In the meanwhile, the Retirement System of Alabama (RSA) promised to fund this growing, capital intensive business. I bet they heard the same-store EBITDA and unlevered FCF pitch and drank the fruit punch. I know I did. Anyways, since 2010, the RSA has funded hundreds of millions of dollars worth of CapEx, store openings, and negative EBITs, while at the same time owning class B pre-IPO equity in the company. This has now converted into a 40% equity stake, in addition to owning all of iPic’s senior debt. Yep, the Retirement System of Alabama is practically fully in charge of a luxury dine in movie theatre concept.
The RSA, just like most investors, has likely had enough. In July of this year, the RSA has declined to allow iPic to draw $10m from its $190m credit line. Why did it need the $10m? To make an interest payment on its massive debt load to … none other than the RSA. The intention is clear. In their pre-IPO filing, iPic outlines its credit agreement with the RSA as follows:
“The remaining availability under the RSA Facility requires us to achieve certain operating targets before we may borrow.” (SEC/iPic)
Last week, iPic announced its Chapter 11 bankruptcy, likely after its operating targets were not achieved and the RSA declined to extend credit. Or, as they say in Alabama, iPic “just got too big for its britches”. After the filing, the RSA lent iPic a $16m debtor in possession loan to maintain daily operations.
The business itself seems to be growing and is profitable from a gross margin standpoint. If the RSA or management can find a way to pump the brakes on corporate overhead, there could be significant operating leverage within the firm, especially as it pushes to expand from 16 to 250 theatres.
I’ve been an iPic movie and restaurant goer myself since 2016 and the business’ value prop is crystal clear. If the company emerges from restructuring, whether or not it is owned by great state of Alabama, continues with its expansion strategy, and takes massive action to cut down its overhead, it will be an investment in my portfolio. Until then, I’ll grab my popcorn and watch from the sidelines (or one of iPic’s patent pending “pod” seats) as the drama unfolds…
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Source for Mr. Ramsey’s interview from AMC:
https://celluloidjunkie.com/2015/01/14/daily-cinema-digest-wednesday-14-january-2015/
Other sources: SEC filings and company presentations