Marcus Corp Q4 FY2020 Earnings Call

Good morning, everyone, and welcome to The Marcus Corporation Fourth Quarter Earnings Conference Call. My name is Liz, 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.

Thanks, Liz, and good morning, everybody. Welcome to our fiscal 2020 fourth quarter and year-end conference call. Please bear with me as, once again, as usual, I need to begin by stating that 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 theatres and hotels and resorts businesses, results of operations, liquidity, cash flows, financial condition and 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, social distancing requirements and the level of customer demand following the relaxation of such requirements. Our forward-looking statements are based upon our assumptions, which are based only upon currently available information, including assumptions about our ability to manage difficulties associated with or related to the COVID-19 pandemic. The assumption that our theatre closures, hotel closures, and restaurant closures are not expected to be permanent or to reoccur, and our assumption about the release of new movies and the temporary and long-term effects of the COVID-19 pandemic on our business. Listeners are cautioned not to place undue reliance on our forward-looking statements. Additional factors, risks, and uncertainties, which could impact our ability to achieve our expectations are identified in our forward-looking statements, which are included under the heading Forward-Looking Statements in the press release that we issued this morning, announcing our fiscal 2020 fourth quarter results and in the Risk Factors section of our Form 10-K, which we're filing today. We will also post all Regulation G disclosures when applicable on our website. Our call will follow our usual format. I'll start by briefly sharing a few numbers from our quarter and year with you, and then I'll discuss our balance sheet and liquidity. I'll then turn the call over to Greg, who will focus his prepared remarks on where our businesses are today and what we're seeing for the near-term and longer future. We've seen the numbers. Excluding some non-recurring items that I will address, our fourth quarter was pretty much as expected. Our theatre results improved compared to the third quarter, but were impacted by the limited number of new films, additional restrictions imposed in some of our markets in November and December, along with strategic decisions regarding openings and closings on our part. As a result, by the end of December, we only had 52% of our theatres open. Now, as we noted in our release, with restrictions being lifted and improved operating assessments, we're back up to nearly 70% of our theatres open and operating now. Also, as expected, results from our Hotels & Resorts segment were softer than our third quarter as the weather turned in our primary Midwestern markets and leisure travel declined from summer levels. All eight of our company-owned hotels are now open as well as all but one of our managed properties. 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 additional property closure and subsequent reopening expenses, with the majority of the expenses in our theatre division. We also incurred impairment charges this quarter related to several theatre properties and our trade name intangible asset. Conversely, we had several non-recurring items this quarter that favorably impacted our reported results and our liquidity. We were awarded multiple state government grants totaling approximately $7 million during the fourth quarter. We also received net insurance proceeds related to COVID-19-related insurance claims. Just to finalize all these numbers, we did include a non-GAAP reconciliation of our adjusted net loss and adjusted EBITDA with our press release in order to show you the impact these non-recurring items had on our reported results. Now there were also a couple of items worth noting in our numbers below operating income. As you'd expect, our interest expense increased during both our fourth quarter and fiscal year due to increased borrowings and a higher average interest rate. It's very important to note, however, that $1.5 million during the fourth quarter and $2.2 million for the full year of our reported interest expense represented non-cash amortization of debt issuance costs and debt discount on our convertible notes. I also want to point out that beginning in fiscal 2021, the accounting for our convertible notes does change. Beginning January 1, we'll show the entire $100 million of convertible notes as debt. There will not be a portion allocated to equity. As such, our reported interest expense in future quarters will not have any non-cash debt discount. Now, in the fourth quarter, approximately $1 million of that total $1.5 million non-cash interest expense was related to the debt discount on convertible notes. That will go away in future quarters. During the fourth quarter, our other expense was partially offset by other income of approximately $1.4 million related to the receipt of Movie Tavern acquisition escrow funds that will return to us in conjunction with a negotiated early release of remaining escrow funds to the seller. Finally, you'll note that we reported net gains on disposition of assets during the fourth quarter. This net gain was primarily due to the sale of two surplus land parcels and one theatre during the period. Our effective income tax rate was 33.8% during the quarter and 36.2% for the year, both periods benefited from previously described adjustments resulting from several accounting method changes and NOL carryback provisions arising out of the CARES Act. Excluding adjustments -- favorable adjustments to the income tax benefit, our effective income tax rate during fiscal 2020 was 26%. We anticipate that our effective income tax rate for 2021 will be in the 24% to 26% range once again. Of course, our actual fiscal 2021 effective income tax rate may be different depending on actual facts and circumstances. Shifting gears away from the earnings statement just for a moment, our total cash capital expenditures during fiscal 2020 totaled approximately $21 million compared to original pre-COVID projected expenditures for the year of $65 to $85 million and approximately $94 million last year, which included the cash component of the Movie Tavern acquisition. Most of this year's dollars were spent in our theatre division on several projects we started during the first quarter. We only spent $2.7 million during the fourth quarter. As we look towards capital expenditures for fiscal 2021, we're currently estimating that our fiscal '21 capital expenditures may be in the $15 million to $25 million range. Many of our projected expenditures are back-loaded to the second half of the year, other than a recliner seating and renovation project that's currently underway at one of our theatres that we originally started prior to the pandemic and the lobby renovation with selected guestroom improvements at our Grand Geneva Resort & Spa. Let me now provide some brief financial comments on our operations for the fourth quarter and fiscal year, beginning with theatres. Total attendance was down 90% compared to the prior year fourth quarter, reflecting the large number of theatres that were closed for all or portions of the quarter and the fact that our open theatres are currently only operating on Tuesdays and weekends. When you narrow that math down to just comparable attendance for theatres that were open in any given week compared to last year, comparable attendance was down approximately 87% for the quarter. Our average admission price at our comparable theatres during the weeks that we were open decreased 13.7% during the fourth quarter but only 0.4% during fiscal 2020 compared to the prior year. Our average admission price was unfavorably impacted by the fact that we continue to only charge $5 for older library film products and we only apply our regular pricing to new films. We're pleased to report an increase in our average concession and food and beverage revenues per person at our comparable theatres of 10.2% for the fourth quarter and 6.8% for fiscal 2020. Our investments in non-traditional food and beverage outlets, shorter lines at the concession stand, and the emphasis we're placing on encouraging guests to purchase their concessions and food and beverage ahead of time, either online or using our mobile app, is contributing to our increased per capita revenues. Shifting to our Hotels & Resorts division, our total RevPAR, revenue per available room, for our seven comparable owned hotels decreased 70.3% during the fourth quarter and 54.1% during fiscal 2020 compared to last year's same periods. The Saint Kate was not open for the entire fourth quarter and was closed for nearly half the year last year and thus was not included in those results. According to data from Smith Travel Research and compiled by us in order to compare our results, our hotels were on par with comparable upper upscale hotels throughout the United States during the fourth quarter and outperform those same-style hotels by nearly 8 percentage points for the full year. The data also indicate that our hotels outperformed competitive hotels in our markets by nearly 6 points during the fourth quarter and nearly 16 points during fiscal 2020. Breaking out the numbers for all seven comparable hotels more specifically, our fiscal 2020 fourth quarter overall RevPAR decrease was due to an overall occupancy rate decrease of 44.7 percentage points and a 16% decrease in our average daily rate, or ADR. Our fiscal 2020 full year RevPAR decrease was due to an overall occupancy rate decrease of 35.4 percentage points and an 11.6% decrease in our ADR. Our fourth quarter occupancy rate for the seven comparable owned hotels was 24.4% compared to a third quarter occupancy rate for the same seven hotels for the weeks that they were open of 36.6%, reflecting the reduction in leisure travel as schools reopened and colder weather arrived. Before I turn the call over to Greg, let me comment briefly on our balance sheet and liquidity position. You may recall that we reported cash and revolving credit availability of over $218 million at the end of the third quarter. Thanks to the receipt of income tax refunds, a portion of the state government grants referenced earlier, and continued strong cost controls at every level of our organization, our cash and revolving credit availability actually increased to approximately $227 million at the end of December. Fast forwarding to today, I'm pleased to tell you that two plus months into the new year, I'm projecting that we're going to end this week at nearly the same amount of liquidity as we had at year-end, thanks in part to the expected receipt this week of the remaining income tax refund from last year, the sale of another asset, the receipt of the remaining state grants awarded last year, and an additional state grant that was awarded in 2021 as well as improved operating metrics in both of our divisions. As we've previously reported, we anticipate an additional income tax refund of approximately $21 million later in the year after we file our 2020 tax return, with tax loss carryforwards also available to be used in future years. We also own the underlying real estate for seven of the hotels in the majority of our theatres, 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. Over the last three quarters, we've established a fairly tight range of adjusted EBITDA, reflecting moving from being fully closed to operating under significantly reduced revenue levels. Even when you add cash interest expense to that number, after taking into consideration our expected income tax refunds in 2021, you can see why we believe we're positioned to continue to sustain our operations throughout 2021 and into fiscal 2022, even in the unlikely scenario where our properties continue to generate significantly reduced revenues throughout 2021. And of course, that liquidity position only gets exponentially stronger assuming revenues in both of our businesses continue to improve, particularly during the second half of the year as currently expected. We will continue to pursue additional opportunities to reinforce our liquidity in the future, which would include sales of surplus real estate and other non-core real estate. As reported in our press release, we received approximately $3 million of proceeds from the sale of real estate during the fourth quarter, and early in our fiscal 2021 first quarter, we sold another asset, further contributing to our liquidity. We also have over $4 million of carrying value in additional assets currently under contract or letter of intent to sell later in 2021. In fact, we believe we may receive total sale proceeds from real estate sales during the next 12 to 18 months, totaling approximately $10 million to $40 million, depending upon demand for the real estate in question. Finally, even after the worst year in our 85-year history, our debt-to-capitalization ratio at the end of fiscal '20 was a remarkably low at 37%, giving us a lot of flexibility in the future. With that, I'll now turn the call over to Greg.

Thanks, Doug. Before I comment on our businesses, I'm going to begin my remarks where Doug left off, discussing our balance sheet. Those of you who have been with us for a while know that in the same 85-year history Doug just referenced, a hallmark of this company has been the prudent management of our balance sheet. We entered this crisis from a position of strength with a debt-to-capitalization ratio of 26%. Almost a year later, that ratio has only increased to 37%, which, as our press release notes, is equal to or lower than the same ratio during seven of our last ten fiscal year ends. I find that remarkable. That conservative approach to our balance sheet has proved to be particularly important during this current environment. You can be confident that we will continue to prudently manage our balance sheet in the future, in order that not only will we successfully come out of this current environment, but that we will 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. We recognize that there may still be some bumpy weeks and/or months ahead of us, but we are very encouraged by a number of green shoots that are springing forth in both of our businesses. The most encouraging news since we last talked is the approval of an initial rollout of three vaccines for COVID-19, including the approval last week of the Johnson & Johnson vaccine. As an operator of movie theatres, hotels and resorts, and restaurants, each of which are based on public gatherings, our businesses are significantly impacted by protective actions that federal, state, and local governments have taken to control the spread of the pandemic and our customers' reactions or responses to such actions. I have closely followed the COVID numbers in our markets and throughout the country as well as the miraculous development of highly effective vaccines to curb and ultimately end this pandemic. While we would all agree that our country got off to a slow start, COVID numbers have been coming down significantly in our markets, the pace at which states are getting shots in arms is increasing rapidly, and the supply of vaccines is expected to increase significantly in the coming weeks and months. We know there is still work to do to return to normal. If we've learned anything from this pandemic, it is that no one can really forecast exactly how the future months will unfold. But there certainly is a lot to be encouraged by. I said each of the last quarters, but it is worth repeating that in this rapidly changing, truly unprecedented environment, 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. Let’s start with the hotel division. 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 year. Another way of looking at our outperformance is to examine market share, which in the hotel business is usually expressed as an index. For example, a RevPAR index value of 100 would indicate that a given hotel is getting its exact fair market share of revenues per available room compared to competitive hotels in that particular market. During the previous four fiscal years, our average combined company-owned hotel RevPAR index ranged between 108 and 112, meaning that, on average, our hotels were getting 8% to 12% more market share than you would expect if everyone got their proportionate share of business. Fast forward to fiscal 2020, an unusual year, where our hotels, along with others in our markets, may have closed for portions of the year, I'm pleased to report that our average RevPAR index for these same company-owned hotels increased to 136. Our hotels had RevPAR 36% higher than you would expect if everyone got their fair share. As demand increases and all hotels are fully operational, we might expect that number to decrease somewhat, but I think it speaks to a flight to quality that should be beneficial in the future and our ability to consistently outperform in our markets. The vast majority of our customers during the fourth quarter and continuing today come from the drive-to-leisure market. It's not that we don't have transient business and group business; we've continued to have weddings and some small group business. Just like in the summer, when we had Major League Baseball teams staying with us, we've had success booking basketball teams this winter. But there are also green shoots in individual business travel, and we believe the continued progress with the vaccine rollout will further spark growth in both of those business travel segments. Most of our customers have been transient leisure customers looking to get away after months of staying home. As a result, naturally, weekend business was the strongest at all our hotels. Properties like the Grand Geneva Resort & Spa and Timber Ridge Lodge performed the best among our hotels as they are well suited for families looking to get away. During our last call, I shared with you that our golf revenues at the Grand Geneva were actually higher than they were in the previous year. I'm happy to tell you that we are having a record ski season at that property. We've been at or near sellouts on multiple winter Saturdays at this resort. With our company-owned hotels primarily in the Midwest, we're still working through our traditionally slow season. Overall, a 24% occupancy rate isn't striking compared to what we would normally expect during our fourth quarter, but it certainly justified our decision to reopen our hotels. As we shared last quarter, reopening our hotels was a mathematical exercise. We made the bet that we would be better off open than closed, and it proved to be a good bet. Despite the expected reduction in occupancy in the fourth quarter as kids went back to school and winter weather arrived, we believe our hotels collectively significantly outperformed what they would have done if they had been closed, thanks in part to Michael Evans, our Hotel Division President, and his entire team. They've done an outstanding job of streamlining our operations, reducing both variable costs and costs that might have previously been deemed fixed in order to keep our hotels open and operating. Looking to future periods, the hotel division's call to action in 2021 is aptly named, Rebuilding Together. We know that we have a long road ahead as we work to get our hotel business back to pre-COVID levels. It will take beyond 2021. Overall occupancy in the U.S. bottomed out last spring, slowly increased during the summer and early fall, and leveled off in the fourth quarter. Higher-rent hotels, like those we generally operate, have been impacted more than lower-end hotels. Most current demand continues to come from the drive-to-leisure market. Most organizations implemented travel bans at the onset of the pandemic, and while there are some signs that some of these bans are beginning to loosen slightly, business travel will likely still be limited in the near term. On the other hand, we have very high hopes for leisure travel and believe there remains a lot of pent-up demand to go somewhere. Assuming the vaccine rollout continues to progress and overall COVID numbers in our markets improve, that may bode well as the weather improves. It is encouraging that many cultural institutions and sports teams in our markets are transitioning their operations to allow more in-person guests and spectators. We're already seeing some of those green shoots besides the comparatively strong winter season we are experiencing at the Grand Geneva, where we had a second hotel experience a near sellout this past weekend. Performance at restaurants like the Mason Street Grill, while still only open for dinner, has exceeded our expectations. However, we will also have challenges; our company-owned hotels have experienced a significant decrease in group bookings for fiscal 2021 compared to where we were last year at this time. Last year, we were still anticipating the Democratic National Convention in July, which has since been rescheduled. We were pleased to see the Ryder Cup rescheduled for September 2021, which is contributing to our 2021 group pace. The Wisconsin District approved financing during the fourth quarter for the expansion of its convention center, currently expected to be completed in late 2023 or early 2024. This expansion should help all of our Milwaukee hotels. 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 quite as much as group room revenues, due in part to increases in wedding bookings. Many of our canceled group bookings due to COVID-19 are rebooking for future dates, excluding one-time events that could not rebook for future dates, such as those connected to the DNC. Some group bookings for the first half of fiscal 2021 have subsequently canceled or postponed their events, and we cannot predict to what extent any of our hotel bookings will be canceled or rescheduled due to COVID-19 or otherwise. Forecasting future RevPAR growth or decline during the next 18 to 24 months is challenging. The non-group booking window is very short, with most bookings occurring within three days of arrival, making even short-term forecasts of future RevPAR growth difficult. Hotel revenues have historically tracked closely with traditional macroeconomic statistics such as gross domestic product. We will be monitoring the economic environment closely. After past shocks like 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, which we believe are uniquely positioned to capture increased demand. In the near term, we believe it is crucial for our marketing message to focus on the health and safety of our associates and guests. We are focused on reaching the drive-to-leisure market through aggressive campaigns promoting creative packages for our 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. Let me end my remarks about hotels by discussing growth for a second. I want to reiterate that our priorities in emerging from this pandemic will continue to revolve around our balance sheet. Every decision we make will always have our balance sheet in mind. On the hotel side, there are clear strategies for growth that can be balance sheet-friendly. We will continue to selectively seek management contracts that we believe are a good fit for us, and there may be opportunities to acquire hotels via strategic partnerships or possibly by creating a fund, all of which would allow growth without significant capital outlays. No one really knows yet what the hotel transactional market might look like and whether there may be many opportunities to acquire hotels that might be experiencing distress. With the entire industry needing capital, we believe there may be an opportunity to acquire properties in need of significant investment and provide added value. If opportunities arise, we want to be prepared. That said, there may be bumps along the way. However, as spring slowly arrives in the Midwest after a long winter, our hotel team is prepared and energized to manage our award-winning hotels, resorts, and restaurants and rebuild our hotel business together. Now, let’s shift to our Theatre division. Doug went over the numbers with you. While I don't intend to spend much time looking backwards, I want to acknowledge a couple of points. First, Rolando Rodriguez and his team, once again, did a very good job managing through a very challenging quarter. With very few new films and renewed restrictions implemented in several critical markets for us in November and December, the team still managed to improve adjusted EBITDA for this division by over $3 million compared to last quarter. They also managed costs effectively, demonstrating that it was evidently better for our theatres to remain open than closed. Our field personnel continue to execute on all the new operating protocols we implemented in response to the pandemic. Our customer experience scores are among the highest we've ever seen, directly reflecting the efforts we have put into offering a safe and comfortable experience at our theatres. Once again, thanks to all our associates in this division. Faced with a limited amount of new film products and the pandemic further limiting customer enthusiasm for public outings, our team had to get creative. We developed innovative promotions and programs to encourage a return to moviegoing among the audience we believe wanted to come back, but were hesitant. This led to the vital accomplishment of the fourth quarter—the development of Marcus Private Cinema (or MPC for short). Introduced in the second half of the fourth quarter, this program has since been a key component of our recovery in 2021. Initially introduced to customers via communications on our website and our loyalty program emails as a way for up to 20 friends and family to buy out an entire auditorium for a fixed fee, we subsequently enhanced our technology. In 2021, we became one of the first theatre operators to offer customers the opportunity to purchase their private cinema experience directly from our website or our app, eliminating the need to call our sales staff. Consequently, the program really took off for us in these first months of 2021. It has three pricing tiers. For the first two weeks of a new film, we charge $175, which then drops to $149. Films tend to play on our screens longer than in our pre-COVID environment, so at the appropriate time, we further reduce the price to $99. We're still showing Croods 2 on our screens, and MPC has given it a longer run than we originally anticipated. We also charge $99 for all older library films and have seen nice success with that product, particularly given that customers could opt to view that same product for free at home. In the past seven weeks alone, with just under 70% of our theatres open, we averaged over 1,500 Marcus Private Cinema shows per week across our circuit, contributing over 25% of our admissions revenue during this time. Thanks to this program, our overall market share of U.S. admissions revenues increased by approximately 50% in the first two months of 2021. Our market share on some individual films has more than doubled compared to our historical averages. Nearly 90% of the shows during this time period were booked directly by customers online or through our app, averaging about 13 people per showing. Every Monday morning, our team reviews the films scheduled to be shown in the upcoming weekend to determine how many auditoriums to dedicate to MPC that week. Importantly, MPC has also encouraged the return of customers to theatres who were previously hesitant to return and experience our safety protocols first-hand. Discussing this innovative program leads me to our Theatre division's call to action in 2021, which emphasizes redefining, refocusing, and rebuilding our business. Marcus Private Cinema exemplifies how we aim to redefine our operations, and we intend to incorporate learnings from the past year into the future theatre experience. Even after our business normalizes and studios begin to release new films weekly, we believe there will still be a place for MPC, especially as a way to enhance typically slower periods of any given film week. Another example of redefining comes from our expanded use of technology. As we've focused on food and beverage, we were among the first theatre chains to enable ordering concessions, food, and beverages through our website and mobile app. We developed this technology prior to COVID, and upon the pandemic's onset, we accelerated our plan, rolling it out in all theatres. It's a customer convenience that reduces our labor requirements and contributes to our already high average concession revenue per person, which we expect to continue improving over time. In the weeks and months ahead, as we emerge from the most challenging time in our theatres' history, we also need to refocus and rebuild our business. This includes reintroducing moviegoing to an audience that has long been limited in their out-of-home entertainment options. We are aware still of the challenges ahead. Yet, plenty of green shoots exist to provide encouragement. The rollout of vaccines and the reduction of COVID numbers are critical in getting consumers comfortable with returning to theatres in larger numbers. These external factors also play a vital role in studios' decisions regarding the release of new blockbuster films. The majority of new films have been delayed over the past year, signaling the importance of theatrical releases for studio profitability. Many were unhappy about the delays, yet they resulted in a significant backlog of exciting films awaiting eager moviegoers. Recently, several new films released have yielded improving box office results, and in our press release, we've listed numerous films scheduled for release in the upcoming weeks and months. Another positive development is the announcement that theatres in New York City will begin reopening with restrictions starting tomorrow, with counties in California, including San Francisco and Los Angeles, rumored to follow suit soon. This holds promise for the studio's willingness to stick to their current release plans throughout spring and summer. While some have speculated whether customers would return to theatres post-pandemic, looking at China and Japan shows us different. Both countries have reported record-breaking box office performances for several films, which we view as encouraging and indicative of things to come here in the U.S. as the situation improves. This past weekend, we witnessed the release of Tom and Jerry, which greatly exceeded expectations. I’m thrilled to share that this past Saturday marked our best day in theatres since COVID. Despite having only one new movie, our attendance reached over 40% of our attendance last year during the same weekend at these theatres. This becomes all the more significant when considering this film was also available to subscribers of HBO Max under Warner Bros.' 2021 COVID release strategy. It illustrates the pent-up demand we believe exists for returning to theatres. Our optimism for the summer season derives from the perception that consumers might have fewer entertainment options. Live concerts and festivals will still face restrictions due to the need to plan well in advance, as well as capacity limits that make their operations challenging financially. Conversely, we can navigate remaining capacity restrictions effectively, offering virtually unlimited showings. Additionally, I believe we have already completed the majority of our theatre renovations and can boast one of the highest percentages of recliner seating, proprietary large-format screens, and food and beverage options in the industry. Our theatres are state-of-the-art, and our future capital needs are considerably lower because of that. My comments regarding the hotel division should not be misconstrued as a prediction that we won’t encounter challenges in the near term. There is a strong possibility of further changes to the release schedule, and many discussions have occurred surrounding the future of the theatrical window. We know uncertainties lie ahead in the coming weeks. Regardless, we've demonstrated that we can conquer every challenge we have faced thus far, and I believe we are adequately equipped to navigate any further challenges as we redefine, refocus, and rebuild our industry-leading theatre business. While our immediate focus must remain on the near term, my comments regarding the balance sheet still apply. Our long-term goal is not only to survive but to thrive. I look forward to the day when we can once again refocus on growth. In closing, in this continually changing environment, you can be sure that we are constantly reviewing the situation in both our businesses and adjusting our plans as warranted. Although we have a lot of work ahead, I must take a moment to express my gratitude. These are tough times, and countless individuals are working diligently. First, I want to thank our lenders and the investment community for their confidence and support during the past year. It has meant so much to us. I am grateful for our associates in the field who have tirelessly worked in incredibly tough circumstances to provide an outstanding experience for our guests. My thanks extend to our associates in the corporate office and those who support the field as well. I also express my gratitude to our dedicated leadership team, including Doug Neis and Tom Kissinger, who continue to work tirelessly in developing and executing strategies that focus on our survival during this crisis while positioning us for future growth. Lastly, I want to acknowledge our Board, especially my dad, Steve, our Chairman, who offers immense years of experience and insight. We benefit greatly from his full engagement. We often quote movie lines around the office. I'm reminded of one from Apollo 13, where one character recited all the potential disasters that could occur, stating it might be NASA's worst disaster. The character playing Gene Kranz at Mission Control calmly replied, 'With all due respect, sir, I believe this will be our finest hour.' I feel the same way about how our people have responded to this situation. I couldn't be prouder of each and every one of our associates. I thank you for granting me these comments. At this point, Doug and I would be happy to open the call for any questions.

We will first go to Jim Goss with Barrington Research.

This is Pat on for Jim. I just had a couple of questions. With the recovery of leisure travel, how do you think that strength in leisure travel, particularly with both leisure travel and bookings like weddings, can remain at an elevated level long enough for group business to return? As you integrate additional costs while also finding ways to operate more efficiently, how should we think about the profitability of that segment over the long term, as you approach pre-pandemic revenue trends?

I'll start with the question about how much leisure can mitigate the impact of missing business travel. I don't think it can completely make up for it, but I think it can certainly help soften the impact. I don't know exactly what the ratio will be. It's similar to the previous patterns we've seen. Leisure travelers tend to come out first because they only need to answer to themselves, unlike a business traveler. As we've seen, people are eager to get out after months of staying home. We know there were all sorts of anecdotal stories about when vaccines became available, people booked travel in advance, saying, 'We're going somewhere.' Our properties lend themselves well to that. If you think about our urban properties, like The Pfister, they can attract wedding and leisure business. But at the end of the day, our core strength lies in group business, and that will take time to recover. Regarding profitability, we are currently in a very efficient operational mode, so we may benefit on the upswing. As circumstances improve, we'll need to focus on getting staff back. Doug, do you have anything specific about margins you want to add?

No, that last point was what I would have brought up as well; none of us thinks we were all carrying excess weight. We had to examine our costs closely, and we’ve looked at costs that we previously viewed as fixed. We are also implementing technology in unique ways. That could lead to longer-term benefits.

And then just a couple of quick ones on theatres. Could you consider approaching the acquisitions market similarly to the hotel market, potentially more along the lines of a management contract approach? Also, how do you plan to reach consumers who aren't downloading your apps or frequently visiting your website? How will you inform them about the general customer satisfaction with your cleaning initiatives?

Let me take that. Yes, we don't want to get ahead of ourselves. The emphasis remains on our balance sheet. That said, we may have some opportunities ahead that could reduce capital requirements. If leased properties are available, they can be done smartly through percentage rent. We have one managed theatre in our portfolio, but speculation suggests there may be opportunities to offer management services.

To add on that, it's not a new concept for our company. When my grandfather started the business, he encountered television's rise. He approached landlords saying he would take over the theatre to manage it, and that strategy led to the successful growth of the business. As for getting customers back, our marketing team has a solid plan, but we need our trade organization to help. Studios have substantial media outlets and can assist in pushing the message that it's time to return to theatres for enjoyable affordable entertainment. Historically, theatres outperform in softer economic times, which we know through experience.

To add, we have a robust loyalty program, but over half of our transactions occur with non-loyalty members. We have a digital marketing campaign focused on reaching people who are streaming and online, so we have strategies to inform them of our fantastic promotions and programs.

Our next question comes from Mike Hickey with The Benchmark Company.

Greg, Doug, there’s been a lot of data shared today. I'm curious about the recent weekend performance of Tom and Jerry. Who would have guessed that film would lead in the theatrical space? We anticipated Wonder Woman would generate more interest. What are your thoughts on families coming back to theatres? Is that an encouraging sign for the theatre business as you have new films lined up?

What’s most encouraging is the recent research about comfort levels returning to theatres. Initially, women expressed the most discomfort, but seeing families return is promising. People have been cooped up for months and are eager to go out, which aligns with our expectation that as more people get vaccinated, they’ll return to theatres. Looking at the experience in China and Japan, they both saw surge box office performances post-COVID, an indicator of potential recovery here in the U.S.

In the last couple of days, we’ve seen more films move into the current scheduling. Peter Rabbit 2 has been rescheduled for May, indicating a positive response to Tom and Jerry’s performance. It shows the studios' confidence in the reopening market and our capacity to welcome guests back with proper safety measures.

Doug, not to put you on the spot, but what are your thoughts on EBITDA performance in Q3 or Q4? Given the projected vaccine rollout, will you approach EBITDA-positive territory on the theatre side?

While we don't provide guidance, the focus is certainly on the second half of the year. If the film schedule remains steady, we are hopeful for a real summer season. We likely won't reach 2019 levels, but positive attributes in the second half of the year seem promising.

Greg, do you see any engagement from newly vaccinated patrons returning to theatres? Are they cautious or are they reengaging?

I don’t think we’ve seen noteworthy engagement from that segment just yet. The group receiving the vaccine largely includes older individuals and health care workers, who have been cautious about going out. There's a stronger emphasis on responsible public behavior after vaccination. However, I believe this will change as more people get vaccinated in the coming weeks.

Our next question comes from Eric Wold with B. Riley.

What are the odds you can get your skilled marketing team to convince moms that A Quiet Place 2 is a family movie? A couple of questions, Doug, on liquidity and cash flow. Can you detail the $10 million to $40 million potential proceeds expected in the next 12 to 18 months? How much of that is surplus? Are there theatres or hotels involved?

There are no hotels in that projection. It's primarily surplus and non-core items. Most of that relates to surplus land parcels that we've accumulated as we expanded and recalibrated parking ratios. Some non-core properties exist but should not impact our operating results much, if at all.

Considering last year’s CapEx of $21 million compared to projected amounts of $65 million to $85 million, with $40 million to $60 million remaining on the books, should we expect normal maintenance spending starting in 2022 or will that lag?

Several of our hotels require larger renovations, but that spending remains on hold for now. Some refurbishments may be accelerated depending on conditions. We expect to see capital expenditures for larger hotels in 2022 and 2023, but there are multiple variables at play.

What about the 30% of theatres that remain closed? How many closures are due to restrictions versus proactive decisions? Based on the current slate, when should we expect those theatres to open?

The closures are primarily strategic decisions as many of those theatres exist in markets where we have others operating. They are ready to reopen as soon as film demand mirrors enough of our criteria to warrant reopening.

At this time, there appear to be no further questions. I would like to turn the call back to Mr. Neis for any additional or closing comments.

Great. Thank you everyone for joining us. We look forward to talking again soon. Our first quarter results will be released in early May, and until then, we wish you all a great day.

This concludes today's call. You may disconnect your line at any time.