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A conversation with David Brain of Entertainment Properties Trust

SCW: How big is the market for modern stadium seating megaplexes?

BRAIN: Our forecast as of 1997 is for 11,000 new screens over a five- to seven-year period. If these facilities average 20 screens, that means the industry will build between 500 and 600 more megaplexes.

SCW: What is your goal in that market?

BRAIN: Say the average screen costs about $1 million, for the land and the building. If the market is 11,000 screens, that's an $11 billion market. Our goal is to own about 20% of that market.

SCW: What are the best locations for megaplexes?

BRAIN: Two years ago, the exhibitors probably didn't expect to put theaters in markets with fewer than 500,000 people. But that has changed, thanks to the success of theaters in smaller markets in Idaho, Nebraska, and New Mexico. The cut-off today might be 350,000 people.

SCW: Considering the size of the market, why are the stock prices of the major exhibitors declining?

BRAIN: I think it has been the success of megaplexes. They are doing business far and away beyond what anyone anticipated.

SCW: Wouldn't that inspire investors to buy stock instead of sell?

BRAIN: It's a good news, bad news situation. The new theaters put so much pressure on the majority of the circuit, the older theaters, that the exhibitors are facing huge comparable store declines. When a new megaplex comes into a market, people drive past the old four-plexes showing the same movie. Suddenly, the old theaters are showing declines in attendance.

I believe this is a temporary problem for exhibitors, most of which are in the early stages of transforming their circuits. An exhibitor's facilities may consist of 20% new and 80% old. With that kind of mix, it doesn't matter how well the new theaters do if the old ones are being destroyed.

SCW: Is there a parallel or analogy for this problem in the retail business?

BRAIN: Yes. You've seen the same thing happen in the growth of superstores. When a big-box home improvement retailer moves into a region, the small hardware stores go out of business. The difference here is that the big-box retailers in the movie business, the megaplexes, also operate the small stores or four-plexes.

SCW: Is this true of all the exhibitors?

BRAIN: No. Some start-up exhibitors are pure big-box or megaplex operators. They can build big new theaters without worrying about the decline of older theaters, because they don't have any. Take Muvico, for example. Three years ago, that company sold out of the business. A year ago, the owner got new venture capital and started building new megaplexes.

SCW: How does EPR fit into the business?

BRAIN: We're basically a finance company, a capital provider that underwrites the real estate for the latest large-format stadium-seating facilities.

SCW: How does that work?

BRAIN: A theater company develops and builds a megaplex. Then we buy the property and lease it back to the exhibitor. So the exhibitor gets its capital back after the sale and reinvests in another theater.

SCW: Will this eventually help the exhibitors to recoup in terms of stock prices?

BRAIN: What we do relieves some of the pressure on the exhibitors. But the problem with stock prices is the deterioration of the businesses of older theaters. We don't have anything to do with that. We haven't bought any old theaters. No one will buy them now and the exhibitors are going to have to slug through this period. They will have to close their older theaters as quickly as they can, as they come out of their leases.

SCW: What will that mean to firms that own properties housing these older theaters?

BRAIN: The developer or investor that owns an old theater will have to scrap the building or rehab it for another use. There is no more need for four-plex theaters.

(NYSE: EPR) At A Glance

Stock Price: Dec. 14, 1999 : $12 15/16

52-week high: $20

52-week low: $12 1/2

For the nine months ending Sept. 30, 1999 EPR's revenue increased 46% to $36 million and net income rose 21% to $17.1 million. The results include the purchase of seven rental properties, in part offset by outstanding long-term debt.


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