Cineworld, chapter 11 and changing preferences

Cineworld files for chapter 11 while Bed Bath stays afloat

Just as COVID-19 restrictions accelerated the demise of many weaker retailers in 2020, the current economic slowdown stemming from the Fed’s effort to tame inflation is beginning to show which retailers are truly resilient and those merely bolstered by government stimulus. Demonstrated most recently by Cineworld Group, the parent company of Regal Cinemas, filing for chapter 11 as ticket sales remain sluggish. The world’s second largest theatre chain operates over 500 locations in the U.S., of which nearly half are leased. Outside of The Diversified Experiential REIT (NYSE: EPR), which owns 3.5 million square feet across 42 properties, the current owner mix is fairly diversified. Cineworld has not yet disclosed plans for disposing of its real estate portfolio but has stated that it has secured $1.9 billion in loan commitments to carry the company through the restructuring process.

Bed Bath & Beyond (NYSE: BBBY), on the other hand, has escaped insolvency for the time being by securing $500 million in additional liquidity in the forms of $125 million expansion of its revolving credit line and a $325 million loan spearheaded by JP Morgan. The home goods retailer has also announced that it will be closing 150 underperforming stores which should provide an estimated $250 million of annual cost savings. The move is most readily felt by the public REITs which comprise 11 of the 20 largest owners of BBBY real estate across 142 assets. However, the decision to vacate also represents a significant opportunity for landlords to backfill the spaces with stronger tenants at market rents.

Bed Bath & Beyond Owner Breakdown

Investors follow consumers back to the gym

After the onset of the pandemic, consumer trips to restaurants, gyms, and other service retailers plummeted along with the flow of capital into these properties; however, it appears that trend has more than reversed. In August, fitness centers saw over 153 million visits across the 23 largest gym chains in the U.S., up 24% over the same month in 2019. Fitness centers saw the highest foot traffic increase year-over-year across all retail industries but the recovery was not equal across workout chains. Of the top ten largest workout chains, EoS, Crunch, and Planet Fitness saw the highest foot traffic increase year-to-date versus the same period in 2019.

This return to the gym has not gone unnoticed by investors as roughly $2.5 billion have traded hands across roughly 170 properties with some gym component, an 80% increase over 2021. Fitness center sales per square foot up 36% year-over-year and new memberships up roughly 9% year-to-date, but gym chains aren’t the only benefactor of a healthy fitness industry. Data from Creditntell shows that retailers located in a shopping center with a gym receives and additional 2.5% more visits than other store locations in centers that don’t have a fitness component. With fitness-anchored retail centers earning an average going-in yield of 7.6% in Q3, a significant premium over retail as a whole, it’s possible that we may see more dollars move into this property type in an effort to maintain an attractive return spread over debt costs.

Foot traffic and capital flows