Marcus Corp Q2 FY2020 Earnings Call

Good morning, everyone, and welcome to the Marcus Corporation Second Quarter Earnings Conference Call. My name is Crystal, and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. 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'd like to turn the program over to Mr. Neis for his opening remarks. Please go ahead, sir.

Well, thank you, Crystal, and good morning, everybody. Welcome to our fiscal 2020 second quarter conference call. As usual, I do need to begin by stating we plan on making 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, 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. 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 second quarter results. All of which you can access on the SEC's website. We'll also post all Regulation G disclosures when applicable on our website at www.marcuscorp.com. With that behind us, let's begin. This will obviously not be a normal quarter for us. And our prepared remarks today will once again reflect that, as we spend less time looking back at this past quarter and spend most of our time looking ahead. I will still begin by spending a few minutes briefly sharing a few numbers with you, but then I'll pivot to more current topics such as our balance sheet and liquidity. Once I do that, I'll turn the call over to Greg, who will focus his prepared remarks on where our businesses are today as we've begun reopening some of our properties, along with our plans for reopening the rest of our properties in the future. When we open the call up for questions, we could certainly be happy to revisit the quarter and answer any follow-up questions, if needed. So you've seen the numbers. Essentially, you're looking at operating results with all of our businesses closed for the entire quarter. On the theater side, our only revenues were from six theaters that opened on a very limited basis in June 2020, primarily to test new operating protocols, as well as five parking lot cinemas, which is our version of a drive-in that we opened and operated during the quarter; and some limited online and curbside sales of popcorn, pizza and other assorted food and beverage items. In the hotels and resorts segment, we still had three hotels opened at the very beginning of the quarter but had significantly reduced occupancies and they closed after the first couple of weeks. We began reopening hotels towards the end of the quarter, beginning with the Pfister on June 8, followed by the Grand Geneva, the Hilton Madison and the Skirvin Hilton in subsequent weeks in June. As the press release notes, we did, once again, have several non-recurring items this quarter directly related to the impact of the COVID-19 pandemic. We incurred approximately $3 million of additional property closure and subsequent reopening expenses with the majority of the expenses in our hotels and resorts division. A portion of these expenses represented payroll continuation and severance payments made to associates laid off as a result of the closures. We also began incurring expenses this quarter related to extensive cleaning costs, supply purchases and employee training, among other items, related to the reopening of selected theater and hotel properties and implementing new operating protocols. 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 non-recurring items had on our reported results. You will note that we reported a larger than might be expected income tax benefit this quarter. In fact, our effective income tax rate was 52.5% during the second quarter and 44% from the first half of the year. Our fiscal 2020 income tax benefit was favorably impacted by an adjustment of approximately $17.6 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 allows our 2019 and 2020 taxable losses to be carried back to prior fiscal years, including years during which the 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 during the first half of fiscal 2020 was 22.8%. We anticipate that our effective income tax rate for the remaining quarters of fiscal 2020 may be in the 29% to 30% 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. And this benefit won't just reduce our reported net losses that we may incur. We believe it will also result in significant liquidity benefits both this year and next year. In the coming days, we're filing income tax refund claims of $37.4 million, with the primary benefit derived from the accounting method changes I just referenced, and new rules for qualified improvement property, or QIP, and net operating loss carrybacks that came out of the CARES Act. 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 the future as well. Shifting gears away from the earnings statement just for a moment. Our total cash capital expenditures during the first half of fiscal 2020 totaled approximately $16 million compared to approximately $60 million last year which included the cash component of the Movie Tavern acquisition. Most of this year's dollars are spent in the theater division on several projects that we started during the first quarter, and we continue to have most future capital expenditures on hold for the time being. Now 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%. Net of a larger cash balance on our balance sheet than what we would normally carry, our net debt to capitalization ratio at the end of the second quarter, even after having essentially all of our businesses shutdown for the entire quarter, was still a very low 32%. Of course, we also own the underlying real estate for seven of our company-owned hotels and the majority of our theaters, representing over 60% of our screens and an 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 provides significant underlying credit support for our balance sheet. We even have some surplus real estate that could be monetized in future periods if opportunities arise. As we've 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. As of June 25, 2020, we had a cash balance of approximately $80 million and approximately $90 million of availability under our $225 million revolving credit facility. So, you can do the math. Our adjusted EBITDA during the quarter was a negative $30 million or about $10 million a month. Even when you add interest expense to that number and maybe just a little bit of CapEx with a combined $170 million in cash and revolving credit availability, plus income tax refunds that may total as much as $58 million combined in 2020 and 2021, you can see why we continue to indicate that we believe the additional financing positions us to sustain our operations well into fiscal 2021, even in the very unlikely scenario that the majority of our properties remain closed. And that doesn't even consider the possible sale of surplus real estate or additional financing, if needed. We believe we continue to be in a strong position. With that, I'll now turn the call over to Greg.

Thanks Doug. As Doug noted earlier, I'm going to focus my remarks on where we are today, what we've 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. In this rapidly changing, truly unprecedented environment, there is 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've 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. We've had to make some very tough decisions in the short term. And 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. As we've now shifted to reopening properties, we're bringing people back and asking them to work under very different conditions. Not surprisingly, our people continue to step up and meet the challenges before us. Words alone don't do justice to how proud I am of all our associates, and I cannot emphasize enough, from our executive team to our people in the field. They talk about the importance of gratitude. I have huge gratitude for everyone because we have fewer people. They're working harder. And as the words were just spoken, they're unprecedented. I am thankful for everyone around me. You cannot do this alone. So now, as I've said, the focus is on reopening all our hotels and theaters. I would like to spend a few minutes talking about where we are and where we're headed in each of our divisions. So let's start with our hotels since the reopening process is the first and still on so far. When we closed our hotels, it was not because of any governmental requirements to do so. Our restaurants and bars within our hotels were required to close, but the hotels themselves were considered essential businesses under most definitions. We closed our hotels due to a significant drop in demand that made it financially prudent for us to close rather than stay open. As a result, our decisions regarding reopening our hotels and resorts will be driven by an increase in demand as individual and business travelers begin to travel more freely once again. In some ways, it is a mathematical exercise. The reopening, what we believe we will be in a better position being opened than closed, even if that means just losing less money than being closed. As we've noted, late in our fiscal 2020 second quarter, we reopened several of our hotels, including several of our restaurants and bars, beginning with the Pfister hotel on June 8, followed by the Grand Geneva Resort and Spa, the Hilton Madison, Monona Terrace and the Skirvin Hilton Hotel in subsequent weeks in June. As expected, the primary initial customer for hotels came from the drive-to-leisure market, as air travel remains significantly reduced. The majority of the hotels we manage for other owners have also recently opened. We are monitoring market demand, and we currently hope to reopen our remaining company-owned hotels during the third quarter of fiscal 2020. In fact, you may have seen the notice that we opened up the public spaces of Saint Kate the Arts Hotel this past weekend. We're not booking rooms yet, but we wanted to activate the first few floors of the community, including our lobby bar, our pizza restaurant and maybe most importantly, our art exhibit space. That first floor is essentially an art museum, and we felt it was important to get that space reopened as one more step towards recovery in Downtown Milwaukee. While the upcoming Democratic National Convention will not provide nearly the impact we all had originally expected, we currently expect to reopen the Hilton Milwaukee Hotel in time for that upcoming event. As we reopen our hotels, we are reopening with new operating protocols. In addition to following all new brand standards for our branded hotels, we have also introduced our own CleanCare Pledge that incorporates the best industry practices and protocols for operating our hotels, resorts, spas, golf courses, and restaurants with an enhanced focus on cleanliness, sanitization, and safety. Key elements and examples of the CleanCare Pledge include introducing new processes and easy-to-use technology to create a low- to no-contact experience, incorporating social distancing into processes at various spaces, outfitting associates with masks and gloves and making masks available for guests who are required to wear them in all of our public spaces, and enhanced cleaning and sanitization protocols that go beyond leading hospitality industry standards and CDC guidelines. Looking to future periods, overall occupancy in the U.S. has slowly increased since the initial onset of the COVID-19 pandemic in March. Similar to our limited experience during the second quarter, most current demand continues to come from the drive-to-leisure segment. Most organizations have implemented travel bans and are only now starting to allow some essential travel, which will likely limit business travel in the near term. While our early performance varies by hotel, I will tell you that occupancy rates, while still significantly lower than they would normally be this time of year, generally exceeded our expectations as we have reopened hotels. Retail pricing has also thus far held relatively strong despite the current lower occupancy environment. 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. However, as of the date of this report, our group room revenue bookings for fiscal 2021, commonly referred to in the hotels and resorts industry as group pace, is running only slightly behind where we were last year at this time for fiscal 2020. The majority of that decline is because last year's group bookings, including bookings in anticipation of Milwaukee hosting the Democratic National Convention in July 2020. We find this very encouraging as we believe this speaks directly to a continuing desire for people to travel and congregate. Banquet and catering revenue in fiscal 2021 is currently ahead of where we were last year at this time for fiscal 2020. Another positive development is the fact that the majority of our canceled group bookings due to COVID-19 are rebooking for future dates, excluding one-time events that couldn't rebook for future dates, such as those connected to the DNC. Another major event that will benefit our Milwaukee hotels, the Ryder Cup was originally scheduled for September 2020, but it was recently rescheduled for September 2021. While disappointing to lose this event in 2020, it is contributing to our 2021 group pace. Forecasting what future RevPAR growth or decline will be during the next 18 to 24 months is very difficult at this time. 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. In the near term, we believe it will be very important to have our marketing message focus on our approach to 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 our new hotel division President, Michael Evans and his outstanding team will effectively manage our operations, and we look forward to reopening our remaining hotels. 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. On June 19, we began to implement our phased reopening plan with the opening of 6 of our theaters in multiple markets with a primary goal of testing new operating protocols in accordance with local health and safety guidelines, and designed to prioritize the safety and well-being of our associates and guests. During this initial phase, we've been showing older library film products, including a combination of films that have been released in theaters during the months prior to closing as well as classic older films, such as films from the Harry Potter Series while we waited for new films to be released. As we speak to you this morning, it appears we may finally have a clearer idea on what the film studio release plans will be. After several stops and starts, it appears increasingly likely that the first new film scheduled to be released is Unhinged, together with the pre-release of Inception on August 21. Disney's New Mutants is currently scheduled for August 28. The much-anticipated Tenet is now scheduled for release in the U.S. on September 3, 2020. Warner Brothers' announcement of this new release date for Tenet was particularly important as they acknowledge that this release will not follow the more common global day and date release patterns we've seen in recent years, but rather will mark a return to the days when films used to be released in different markets at different times in the industry, what we call platform release. Warner has indicated that film will first open overseas and has further acknowledged that when it opens in the U.S., it may not open in every market initially. Rather, it will open in as many markets as it can with other markets to follow as any remaining restrictions are lifted. The good news for us is that state and local governmental restrictions have been lifted in the vast majority of the markets in which we operate theaters, allowing movie theaters to reopen. As such, assuming the current release schedule holds, we expect the majority of our theaters to reopen in late August in time for these new movies. As part of our reopening experience in our theaters, we've introduced our Movie STAR, S-T-A-R, approach, which incorporates new health and safety measurements and is in alignment with CDC guidelines. Specific measures we are implementing in conjunction with the reopening of theaters include, but are not limited to: initially reducing each theater auditorium's capacity by 50% and implementing a checkerboard seating pattern that will allow guests to reserve seats together with two empty seats between groups to allow for proper social distancing in accordance with CDC guidelines; staggering showtimes to limit the number of people in common areas of the theater and allowing extra time between shows for thorough cleanings; requiring masks to be worn by guests, except for when they are eating or drinking in the auditoriums; conducting associate wellness checks and requiring the use of face masks as well as gloves as appropriate during the associate shift; increasing the frequency of cleaning, especially high-touch surfaces; providing hand sanitizer throughout the theater; and introducing signage to encourage proper social distancing; encouraging guests to purchase their tickets online or via the Marcus Theaters app; and encouraging low contact food ordering through our proprietary Marcus Theatres app and website with food orders picked up in a designated area within the theater. We expect policies and guidelines will continue to evolve with time and will be assessed and updated on an ongoing basis. Our goal is to build consumer confidence and trust as quickly as possible, and I am pleased to share that we have received extremely positive comments from the guests who have been coming to our six test theaters. Our team has done an excellent job executing on new protocols. Something that's come up before, but is worth repeating is that the reduction in capacity does not necessarily translate to an equal reduction in potential revenues. Reduced capacity may potentially impact attendance on $5 Tuesdays and in opening weekends of major new film releases, but other showings may be relatively unaffected given normal attendance counts. Based on our past experience, we believe the customers impacted by $5 Tuesdays and opening weekends may adapt to reduced seat availability by shifting their attendance to different days and times. Additionally, as new films are released, we anticipate indicating a larger number of auditoriums to the blockbuster films to increase seating capacity for those movies. We believe that the exhibition industry has historically fared well during recessions. Should one occur as a result of the COVID-19 pandemic, we remain optimistic that the industry will rebound and benefit from pent-up social demand as home sheltering subsides and people seek togetherness in an attempt to return to normalcy. A return to normalcy may span multiple months driven by staggered theater openings due to government limits, reduced operating hours, lingering social distancing requirements and a gradual ramp-up of consumer comfort with public gatherings. There is a significant number of films scheduled to be released during the remaining months of the year that may generate substantial box office interest, including multiple films that were originally scheduled for the first half of fiscal 2020. The anticipated film slate for 2021, which will also now include multiple films originally scheduled for 2020, is currently expected to be very strong. Just as we've had to adapt our plans in the past month, we recognize that we will need to be prepared for new challenges and opportunities in the weeks and months ahead. 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 deliver a truly great movie-going experience to our guests. Normally, I would end my prepared remarks at this point and open the call up for questions. But first, I want to address the elephant that entered the room last week. There's been some speculation that the COVID-19 pandemic may result in a change in how film studios may distribute their product in the future, including accelerating the release of films on alternate distribution channels, such as premium video-on-demand, or PVOD, and streaming services. Of course, that speculation increased exponentially last week when AMC and Universal announced the deal they negotiated that would, according to report, significantly shrink the window for select films to be released on PVOD. So I suspect you might wonder what we think about that. So to begin with, let me say this. Our relationship with the film studios is very important to us. We are partners in an $11 billion to $12 billion U.S. exhibition industry and over $40 billion industry worldwide. It's an established fact that film studios derive a significant portion of their return on investment in film content from theatrical distribution. In the past months, while theaters have been closed, studios have continued to acknowledge that there's no economic model to recover the size of the investment in the big theatrical move without theatrical revenue, and their actions to delay the vast majority of new films until theaters reopen rather than release into the home is a direct confirmation of that. Thus, we believe both studios and exhibition are aligned in their interest to preserve the theatrical experience for our valuable customers. We believe an appropriate theatrical window is an integral part of that aligned interest. Second, I will say upfront that we never have conducted our negotiations with the studios in public, and we don't intend to start now. We will continue to talk to our studio partners about terms, windows, financial models, etc., as we always have, but in private as it should be. While speaking specifically to PVOD, what I'm about to say next applies to any changes in the financial and our distribution model of our business. Our position has always been that, like in any successful negotiation, any change in the existing model needs to be a win-win for the studios, the exhibitors, and the customers. Our common goal should be to grow the size of the pie. I also think it's important to put all this PVOD talk in perspective. While acknowledging that consumer behavior can and will change periodically, history suggests that the normal conditions when all forms of entertainment are available to the consumer, the market for PVOD may not be particularly deep. I think everyone would acknowledge that these last four months were not normal with theaters essentially 100% closed and other forms of out-of-home entertainment also not available to consumers. I would suggest this period tell us very little about the depth of a $20 PVOD market. We are in the business of out-of-home entertainment. Just as I mentioned earlier in my hotel remarks, we believe people want to travel and congregate. We firmly believe that human beings have an innate desire to get out of the house and interact with people. We seek social experiences. In fact, you could argue that this very same human characteristic is an underlying reason for the challenges our country continues to face during this pandemic, and it won’t always be this way, whether it is improved treatments, a vaccine, or in the near term, everyone just being smart and safe. We will get to the other side of this, and we believe consumers will seek out those same out-of-home experiences they've always sought out in the past. We're already seeing signs of that in other countries. And similar to pre-pandemic days, when they decide to stay home, they continue to have a plethora of other entertainment options available to them at a price point significantly lower than $20. As you can tell, I'm passionate about the exhibition business. We've made significant investments in our theaters over the last six years, and we believe we've built a theater circuit that is second to none in terms of the entertainment experience for our loyal customers. We believe distributing films in a movie theater will continue to be an important component of their business model, and we look forward to a continued healthy relationship with them in the future. In conclusion, in this rapidly changing environment, you can rest assured that we are continually reviewing the situation in both our businesses, and we will make changes to our plans as warranted. The company is built for challenging times like this. Our leadership team, managers, and associates have stepped up to the challenge in ways that go above and beyond. For that, we are most grateful. We also very much appreciate the confidence and support of our lenders and 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] And our first question comes from Mike Hickey from The Benchmark Company. Your line is open.

Obviously, it feels like you've gotten through the crux of the issues here is sort of get on the offense on the reopening process. A lot of positive data you shared with us in terms of the hotels and group pace for 2021, etc., theaters. It looks like the vast majority will be open here pretty soon. I realize maybe 2021, it's hard to balance in terms of where you are, I guess, relative to 2019. But I'm curious your view there? And then should, as we stretch out a little further to 2022, should we sort of think 2022 here is back to normal like 2019 or bigger? But your thoughts there would be appreciated. Then I have a follow-up or two? Thank you.

I mean I'll start, Mike. And look, I mean, we haven't even opened our theaters yet to speak of. I mean that's with new products. So we certainly have a lot to learn yet about what the pace of the recovery will be on the theater side once we reopen. As we said in our prepared remarks, there is look, there's a lot of product. And 2021 has a whole bunch of films that were originally scheduled for this year that were moved in on top into a year that already had quite a few films thatlook very positive. So on that side, we're certainly very optimistic. But look, until we get open, until we start seeing how this - how the customers respond to try to now compare 2021 to 2019, that's tough, as you can imagine. I imagine that will be tough for anybody to try to do it right now. Certainly, on paper, we're going to have the goods to be able to deliver to the customer. So assuming that things continue to progress, we certainly think that as we get - as the year goes on, it will just progressively get better, but this will be a process. This won't be an overnight event.

Yes, I mean the only thing I would build on that, yes. I mean, I have no idea what's going to happen in the short-term. I have no idea, even in sort of the medium term. What will look like 2019 or better? But what I do know and what we've talked about here is that, and we're in this for the long haul is that people want to be together, I mean you just look at the news. They're crazy. You can't keep them apart, unfortunately. As we talked about in our prepared remarks, it's just nuts. Which, as I said, which is short-term, not really a good thing, but long-term, it says human creatures are social animals and they want to be together, and they want to do things, and there will be pent-up demand. I think that bodes well for all of our businesses. But in the short-term, who knows.

Fair enough thanks Greg. Just the last question, just sort of curious maybe what the demo looks like for the moviegoers coming back to your theaters? And sort of if I guess, the durability there, you think of that demand. I imagine you sort of come back, you're dying to get out of the house, you want to do something theaters - or obviously, escape as it makes a lot of sense. But curious if you feel there's in that demand? Then wondering about when pricing will come back on the tickets that sort of comes back with the tent poles that are planned here pretty shortly. And also wondering how your concession sales are gaining and how you expect they will trend, that's it from me guys? Thanks best of luck.

Yes, I can take that. The demos, I don't know the specific demos. I can speak anecdotally. I mean I've seen, surprisingly, all ages going into our theaters, the ones we've been testing. Again, I think the durability of people going will depend on so many things: the environment, what's going on with the virus? What is - how the product is - at the end of the day, we're - and people who - when good product goes out. And I said we've been heartened to see what's happening in other - in international markets. The numbers are starting to pick up. They described it yesterday, I saw as Europe had green shoots. And I know I think South Korea has had some success. So seeing - people will go to see the product that is good. They have to feel comfortable. The one that we've seen really, really, very, very positive, we've been running our customer service scores through our loyalty program, and we're seeing very positive commentary really, really, very surprising. I was surprised how strong this has been and how comfortable people feel and how - what they think about the experience. And so, we've - so again, I think it's all those things coming together that will promote that durability. And on the concessions per cap side, it's been very strong.

Yes, I would just - maybe the only thing I would add to the comment is that, obviously, showing library product, just like if we're showing new products, the demos are tied into what you're showing as well. But I would echo what Greg indicated. It's not as if there's no demo that hasn't been represented. I mean we're seeing seniors. We're seeing adults. We're seeing families. And so, it's not as if we've looked at it and said, boy, the theater looks different today than what it was before. So that's encouraging.

Thank you. Our next question comes from Eric Wold from B. Riley. Your line is open.

A couple questions, kind of a few follow-ups from the prior ones. I guess one, I'll start with concessions. Any major changes to what - the food and beverage product you have available to pay trends when the theaters open based on kind of cleaning restrictions or handling restrictions, Movie Tavern and the other locations? Or is that going to be pretty much status quo when you reopen?

In terms of the offerings, the offerings are not changing so much as the procedures are changing and how we do it. I would speak to our - this idea of the low to no contact and something where we've been really ahead of the industry, and I'm really proud of our team. Kim Lueck and her IT team really got us in a place that we - it's an angle we plan for this but this idea of being able to order on the app. I mean that's - that idea, you can - you preorder your food. We can prompt you to preorder your food before you come to the theater. And then - and your food is ready to pick up there. You don't have to wait in the line. You don't have to deal with a vendor, concession attendant. You're able to just show up and pick up your food. That, I think, is something that will be - and they talk about this, the environment now accelerating things. That really was just an accelerating trend, not one that became because of it, as I said, because we are so focused on food and beverage. And we had such challenges in the labor markets, getting people. We were trying to figure out, okay how do we take labor out of the equation? Well, if you use technology to your advantage, you can do that and that led us to over the last year, I talked about it on the last call. We were ahead of the industry and getting testing on the application as part of our app. And as I said, we probably - we have shrunk the menu a little bit, but not tons. And the - Movie Tavern, we're changing. We're not necessarily going and taking orders at the seats, and we're not - we were changing that procedure a little bit as well right now for these times. People have to go out and pick up their food and bring it in. That is more - so it's been procedure, less menu. Well, a little bit of menu, but not much.

And then you mentioned the capacity limitations you're doing at the theaters, the 50% on the checkerboard seating. Is that the norm across the circuit when they reopen ahead of Labor Day? Are there any markets where it's measurably less than 50% and what is your view as you get to the end of the year where you could be in terms of capacity limitations?

I think that is the vast majority of the circuit is 50%. There may be one or two that was a little bit less. And something that may come that might be less. But the way vast majority is 50%. And we feel comfortable having seen what happened with recliners that we can do pretty well in that environment.

Eric, just I want to add on, if you look at our footprint of theaters, that's certainly to our advantage in this situation because of the markets that we're in. And so, they are pretty much 50% else everywhere. We're only in really, literally in two markets that we're still keeping an eye on. And it's only - we've got one theater in the state of New York, and we've got three theaters in Pennsylvania. We're keeping a close eye on those markets. But that's four theaters in total. So we're very - we're fortunate from that perspective.

Okay. And then final question, I guess, more of a longer-term, broader question. I guess you obviously mentioned again at the beginning that you own the majority of the real estate beneath your theaters, north of 60% of your screens. It's obviously been a big boost in recent years with your remodel strategy and that you haven't really had to deal with landlords in terms of what you want to do with the theaters. It's going to help you on the restart, in terms of having a lower breakeven point with less rent expense than others. But I guess assuming once we get into a more normal situation, some of the real estate has not been reflected in your valuation versus your peers. As you get back to normal levels, how aggressive would you be willing to be to unlock some of that value for shareholders?

Boy. Eric, I mean, I'll start. And Greg jump in if you want. But I mean, so as we've talked about - we've talked about this multiple times before this all happened. In our core real estate and particularly on the theater side, it's proving to be exactly what we said it was, a strategic advantage for us. It was a strategic advantage for us in growing the company over the last six years. And now it's a strategic advantage for us in going through all the craziest times we've ever seen in the industry. So it's tough to change that perspective on our theater real estate specifically. Having said that, and we alluded to it briefly in the comments, we've got a lot of real estate. And so it doesn't mean that there couldn't be some selective monetization. We also have a lot of surplus real estate. Former locations, excess surplus land and outlets and real estate that we own. So the possibility to unlock and monetize real estate is always there, and we've done it selectively and periodically in the past and we certainly could do it in the future.

Yes. I mean I would build on this just a little bit, and that is to say, to sort of say, yes, it really has been such an advantage for us over the years. It may be incumbent upon us to be better at working to really press and educate the investment community on the value of that real estate and really try to stress that point. I would say that I would rather do that than give up our strategic advantages that we've seen because you can always ultimately go and monetize something. It's a one-time event, but I prefer to get better at telling the story.

And our next question comes from Jim Goss from Barrington Research.

Okay. I'm wondering first, if you could - if you have any estimate of the continuing cost of sort of the new normal in terms of cleaning protocols and any offsets you might have to that increased cost allocation?

Well, Jim, I mean, we - there's really two categories. There's kind of these nonrecurring expenses. And we'll have some more of that in the third quarter because we'll be reopening some more - a few more hotels and we'll be reopening our theaters. So there are some of these nonrecurring costs that fall into the - Greg listed some of the categories or I had mentioned a few of the candidates that they fall into. Some of it can be even capital. There are things that we have to do to get the theaters, get the hotels ready. We'll call those out again in the third quarter to the degree. And you saw in order of magnitude of what it was this quarter, it was about $3 million. On an ongoing basis, that's a little harder. Until we really get our theaters open, for example, it's going to be harder to tell on that. I mean there are a whole bunch of smaller supplies, right? And you're not going to notice those that much. And they get mixed into that - kind of that soup with all of our other costs, where we're also trying to be very cautious about our cost structure. We're trying to operate our theaters and our hotels and we're trying to think outside the box and trying to operate with less staff. So I don't know if you'll notice some of the things that are specific to the operating protocols in our operating costs going forward because it all gets thrown into the soup and mixed together. There is no one single cost that is so large that we have to say, okay, well, you better prepare for the fact that we're going to have x amount a year related to this or that. Until we get the theaters open, there could be a time when we ultimately say, look, our new operating structure and cost structure is going to look like this, but until we get the theaters open, it's hard to quantify anything.

And I think that that's - you've got to be looking at - it's a more of a medium-term thing in terms of whatever the - we will have ongoing labor because the increased labor costs as we open - as we - even in this environment, dealing with sanitization and customer orientation. We will see some increased labor cost. I think that's - I think for the most part, that is a medium-term kind of thing because once we get past having to operate in the pandemic environment, and we will see a return to a normalized environment, whenever that might be, might you see a little more cost in terms of labor, in terms of things you might say, yes, this is a good thing that we were doing that anyway. But I think it will be offset by what I was talking about earlier, the technology changes that we're going to have put in place that's going to reduce people working at the box office and reduce people working at the concession stand. As people use technology to access our theaters and our concessions and so, in our food and beverage product. So, in the end, probably not much change. In a medium term, we could see some increased costs.

Okay. And Doug, just a housekeeping question - the timing of the inclusion of those very nice tax benefits you outlined. Will that be in the third quarter reports then?

So there's two different issues. There's the P&L impact, which is already reflected in, I mean there's a large part reflected in the numbers we reported today. It will continue in the third and fourth quarters, and it will come through in the third and fourth quarters because of that higher effective income tax rate that I referenced in my prepared remarks. Normally, as you know, you might see, I don't know, a 24%, 25% effective tax rate under normal conditions. Because we'll still be able to take some of our losses in the third and fourth quarter back to prior years, we're right now estimating that that effective rate might be 29% to 30% in the third and fourth quarters. So that's one way that you'll see it. The other way is a balance sheet. If you look at our balance sheet, you'll see that there's a large refundable income tax number there. Those claims - part of that is claims that we're filing right now. We expect to receive in 2020 as we file our 2019 return and the claim - refund claims that go along with that. A part of that refundable will stay on our balance sheet through the end of the year and because it's additional refundable taxes that we're accumulating in 2020 that we'll get back next year.

And then with both the hotels and the theaters, I assume mask protocols will be in place at both types of venues. How are you thinking in terms of enforcing that and - is that a challenge or is that something you're seeing not to be so much? And maybe also in the theater area, the rewards program wondering how that fits into this whole process?

On the mask protocols, we require everyone to wear a mask. Frankly, you know what most of the country is getting it. I think that it's two months ago, it might have been harder. Yes, it probably would have been. But I think so much of the country - yes, there are people who, for medical reasons can't. And if they can't for medical reasons, then they don't wear a mask. But if someone is saying they aren't going to wear a mask, then we ask them not to patronize our establishment. We really don't ask them. We ask them to put on the mask. We're seeing very, very, very high compliance because they understand that this is about staying in business. It's funny. The idea - the masks are - and I talked about this before, nobody likes them. I don't know anybody no [gee], I want to wear a mask. But I know everybody likes the economy functioning. The only thing the economy functions is if we're able to keep the virus at bay. It seems that the mask - I've seen numbers just looking around Wisconsin, where Madison - we had a problem. They put in a mask policy, and the problem has started to abate, City Milwaukee, same thing here. You see that the science shows that it's working, and that's good for business. A lot of people are coming around to that. It's temporary. It will eventually - it will go away. It's not about the person. People who are just distanced on my mind soapbox for a minute, it's about people always say, it's my choice. Well yes, but really their actions impact others. And that's when they have a different approach. It's just like I'm not allowed to drive on the street in front of my house 100 miles an hour because they worry I might hurt someone else, including myself. That's the reason behind it. As more people understand that, they go, oh, okay, I get it. So that's been fine, I would say. And your second question, Jim, I forgot what was it?

I was just saying the rewards program is typically?

Yes, same thing. Look, it's been great to have it. It's been great to be able to - for all these years we never knew who was coming to our theaters. We just never knew. They paid cash and they went into the movie theater and they were anonymous. And now - half our transactions are coming out of our loyalty program, it's still very - we're still seeing significant percentages even in this environment in the small tests that we're running. It's great to know who they are. We've been able to stay in contact with them throughout this whole experience. And they continue to be customers, and so it's very beneficial to us.

And lastly, I just wanted to compliment you Greg, and the way you outlined your position on the windows issue. I think it is clear that first run domestic box office is a significant share of the studios' revenue base. I agree the confirmation that's indicated by putting off rather than going to PVOD and the major films. Those are really good points? Appreciate it.

Thanks, Jim yes if I could just - I'd build on it just a hair. That is simply, again, as I said, the goal is to grow the pie. By the way, there's good news in this, isn't it? At least we're having a discussion about the future of how we're going to divvy up the pie. That's good. That means that there's going to be a theatrical business. We should all take heart. If it's that - I'd much rather have that debate, instead of when are we going to open. But that pie has to grow larger. And we have to be careful that we don't shrink the pie because shrinking the pie, by the way - well-intentioned people have made mistakes. When you shrink the pie, it doesn't just hurt us. It hurts the distributors, too. They don't recover it in the PVOD side. As we talked about it, and you just alluded to, it's hard to know necessarily the normalized environment. How big that will be. I would just end with - there's an old saying, and I remind anybody who's thinking about as they alter the model and don't leave a good party in pursuit of a better one. And also, let's not forget one other point. Nobody talks about this, and I want to talk about it for a minute. This is about - and this whole discussion they've had about PVOD. This is all about figuring out how to make those mid-market movies more financially viable for the studio so that they can get more out of theatrical and more out of the secondary markets. I know that's what their goal is because that's been the challenge. We applaud them, and we want to be a part of that discussion. But one of the things - and we want those mid-market films to succeed. They always talk about oh, the cost of releasing a movie is so high, like we talk about, but that's never going to change. That actually is going to change. One piece of that equation is - actually, I argue both pieces of P&A, prints and advertising. The cost of P is coming down. I hope it's not 0. But when the VPFs go down, the virtual print fees, I would like a little bit of money for maintenance. It would be nice to have a little something because these projectors and all the components do - they are a lot faster than the older projectors. But virtually, that's going to go down to a very small number. One of the things - and we applaud them, and we want to be a part of that discussion. But I think there could be a way to generate a greater revenue. I think we'll find ways to work with them to push those mid-market films.

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

Well listen, I just like to wrap up by saying thank you for joining us once again today. We do look forward to talking to you once again in approximately three months when we release our fiscal 2020 third quarter results. And until then, thank you, and have a great day. Be safe. Be healthy.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a wonderful day.