A potential cascade of movie theater closures presents a major problem for mall and shopping center landlords already contending with an overflow of retailer tenant bankruptcies and anemic space demand, according to an expert in lease restructuring.

U.K.-headquartered Cineworld, parent of Regal Cinemas, the second-largest movie theater chain in the U.S., said last week that it would "temporarily suspend operations" at Regal theaters on Oct. 8 in view of the "increasingly challenging theatrical landscape and sustained key market closures" related to the coronavirus pandemic.

Citing anonymous sources, Matthew Weinstein, leader of the real estate lease restructuring group at the law firm Cozen O'Connor, said the move portends but does not guarantee an imminent bankruptcy protection filing.

"Those stores that haven't come to my [landlord] clients and asked for rational relief are the ones that are filing for bankruptcy. The ones that actually are starting a dialogue and saying, 'This is going to be bad for me. This is going to be bad for you. Let's work on something' — they seem to be avoiding bankruptcy. I haven't decided yet where Regal is in this whole process," he said.

B&B Theatres, the sixth-largest theater chain in the U.S., said it is months away from filing for bankruptcy protection, CNBC recently reported.

'Last nail in the coffin' for malls?

Most movie theaters are renters, and the nationwide closures put yet more pressure on retail landlords grappling with retailer bankruptcies, downsizings and rent collection during the pandemic, Weinstein said. A liquidation scenario, should it come to pass in Regal's case, would present a "serious problem."

Large movie theater chain locations of Regal's ilk typically come in two varieties: as parts of regional malls, or as individual pad sites. At the mall locations, a closure could trigger co-tenancy clauses in other retailer tenants' leases, allowing those other retailers to terminate their lease or pay a percentage of rent. Landlords are already contending with co-tenancy issues as a result of department store closures, and the added challenge could push them over the edge, Weinstein said.

"This could be the last nail in the coffin" for particular mall properties, he said.

Among U.S. real estate investment trusts, EPR Properties has high exposure to Regal, deriving 16.7% of its total base rent from the theater chain. RPT Realty and Realty Income Corp. also have relatively high exposure; Regal leases account for 3.0% and 2.9%, respectively, of the companies' total base rent.

Movie theater lease terms have contracted over the years. Today, a theater lease is shorter — as short as five years — but with longer extension options, to account for growing uncertainty around the business, Weinstein said.

Both AMC Entertainment Holdings Inc. and Cinemark Holdings Inc., the other two leading theater chains in the U.S., have said they plan to remain open, even with the abbreviated slate of new movie releases this fall. "We do not currently have plans to close our U.S. theatres and are continuing to align with demand, including reducing operating hours and days while we await new studio content to encourage theatrical moviegoing," Cinemark told The Hollywood Reporter.

However, other theater closures are likely, given the labor and operational costs of running a theater while attendance is so low, Weinstein said.

"I'm surprised there haven't been more closures, more often," Weinstein said. "I'm actually surprised [the Regal closures] have taken this long."

Conversion potential

There is a "silver lining" in the mass theater shutdown, according to Weinstein. Movie theater spaces, unlike multi-story department stores, roughly match the square footage of grocery stores and can be converted with relative ease. They also have the dedicated parking that expanding grocery chains want.

Grocery stores have not only survived the pandemic but thrived during the related market dislocation, and Weinstein said a few in his client base, which includes public REITs, are exploring more theater-to-grocery conversions based on the success such projects have had.

"It's an opportunity to reposition malls," Weinstein said of the theater closures. "People don't think of regional malls as grocery-anchored centers, but that's something that's been tried, and it's frankly driven traffic."