#santikos

2020 was a dismal year for movie theaters. Amidst the coronavirus pandemic, the domestic box office plummeted 80% from 2019, as theatergoers stayed home in droves, opting to watch programs and movies on streaming platforms like Disney Plus, Netflix, and Amazon Prime.

In San Antonio, Santikos Enterprises also felt the pinch, despite being open since May with COVID-19 safety measures such as weekly virus testing for employees, and advanced hygiene and sanitization methods at its theaters. A normal year of revenue would have been about $110 to $115 million dollars, according to CEO Tim Handren. Last year’s take was only about a quarter of that. Not only is that bad for keeping the business open, but it also meant to profits were funneled into the San Antonio Area Foundation, which Santikos contributes to per the directive of the cinema chain’s late founder, John L. Santikos.

Looking ahead to 2021, Handren says “If we can get back to where we’re at 50 percent of normal, that’s awesome.”

A vaccine rollout means there’s a light at the end of a long dark tunnel, but what’s on the other side? I spoke to Tim Handren via Zoom a couple of days before Christmas. We opened our conversation by talking about the details of a $50 million loan Santikos received in December from the federal Main Street Lending Program and local sponsor, The Bank of San Antonio. Handren also hints at changes to the company’s future expansion plans, and talks about new safety measures at the theaters: “We're innovating in a very different way.... It's not around sound and projection, it's around protection and safety of our guests and our employees.”

This interview has been edited for clarity and length.

Nathan Cone: I guess I want to start off by making a quick movie reference here. Have you seen “Philadelphia?”

Tim Handren: Sure.

So Denzel Washington in the movie is going around all the time saying, “OK, explain this to me like I'm a six-year-old.” And so that's how I want to start off. Explain this to me like a six-year-old. What exactly does the $50 million dollar loan that you're getting from Bank of San Antonio do for Santikos' books right now, and in the near future?

So let me give you a little bit of background about where we were prior to us getting that loan. So when John Santikos died in 2014 and left this gift to this community, his businesses, his real estate businesses, theater business, it wasn't without debt. There was a couple hundred million dollars in debt that came with what John left behind. And I think that's a normal business practice as you're building theaters. And he was unique in that he owned almost all of his own theaters. So he took out debt for the construction of those theaters. So let's fast forward to 2020. We still have debt on a lot of these theaters… that we continue to carry. And because we were in an industry that the bankers considered highly distressed, they look at us as... in banking terms, they call this "workout" or "special asset." Special asset is a polite way of saying, we think you're in trouble and we don't think you're going to make it. And so what they do--this is a banking practice, I'm not passing judgment--but what they do is tend to look at the healthiest companies first and they say we need to take out as much of the equity as we can from your company to pay off your debt. And, at a time when what we were trying to do as a company is preserve all our cash, cut all our expenses and just hang on and survive. That's what a lot of folks in the entertainment business, hotel business, bars, restaurants, they've all had to do. So our bankers were frankly just breathing down our necks saying "you need to pay off your debt."

And we looked at this loan. It's really called the Main Street Loan through the Bank of San Antonio as our sponsor bank. But it's actually a loan from the Federal Reserve System out of Boston. They said "We want to provide a bridge to companies who need it. We know that you may have debt or you may have expenses you can't handle right now. We will give you up to $50 million dollars in a loan. And what we'll do for that loan is we won't require you to pay back principal and interest for the first year. $50 million dollars, that's a big number, right? That's going to be almost six million dollars annually with our current loan, that we were going to have to be paying at a time when our revenues are severely distressed. So by getting this loan, what it allowed us to do is pay off the bankers who are making us pay down our debt and to continue paying, or servicing our debt. It allowed us to buy deferral of a year to pay no interest, no principal. And in the second year, Nathan, we pay interest only. And so what this buys us is time. So from a cash flow standpoint, I'm not having to pay down that debt. I can use what cash we do have to pay for our employees and pay for our operating expenses. But I don't have to worry about paying for that over the next 12 months and an additional 12 months of interest only. It's a big deal.

You mentioned just a second ago that there was a federal loan behind it, but Bank of San Antonio had to approve it for you guys… is that the way it works?

Yeah, the Federal Reserve System set up this lending capability. They set aside trillions of dollars, but very few people actually took advantage of it. They relied on the banking system to underwrite the loans. So they say to these sponsor banks--and that's what Bank of San Antonio is--"You do your normal underwriting, but base it on 2019 financials, don't base it on 2020." And we had to find a bank that was willing to work with us. We talked to at least seven banks and most weren't willing to do this loan. And Bank of San Antonio… they leaned in at a time when we needed to because they feel like our business is well-run, we're a strong company. And when they come in and did underwriting with us earlier in the year, they liked what they saw. So, yeah, they are the sponsor bank to get us into the Federal Reserve application process and they carry a little bit of risk. They carry about five percent of the risk of the entire loan. They aren't carrying the full $50 million dollars in risk. They carry, frankly, two and a half million dollars. This is what the math is.

So Bank of San Antonio feels that there is a future for the operation. Was their judgement the opposite opinion of those other banks that you approached?

Yeah, I wouldn't say it was the opposite opinion, because what we used as collateral for the loan was some of our theaters. But here's the deal. When you take out this Main Street loan, there is a fee that you have to pay. The Federal Reserve Bank charges a one percent fee, and then the sponsoring bank can charge up to a one percent fee. One percent on 50 million dollars is a lot of money. It's a half a million dollars. And so every other bank that we spoke with, we asked, are you willing to negotiate on the fees? And they said "no." And Bank of San Antonio said "absolutely." Again, they've spent time with us getting to know us over the past year. They recognize the situation that we're in. I think their view is we're going to make it. We believe very strongly that we're going to make it through all of this and therefore we're going to have a great relationship with these guys.

The San Antonio Business Journal reported that three of the nine theaters were being kept as "free and clear" assets, hence that the company may be able to leverage those in the future for capital if need be. Which locations are those? What kind of situation would merit something like that?

Well, so in the situation we were in with the other bankers, they had essentially... they required us to put every one of our assets up as collateral against the loan and that eliminated any future ability for us to leverage those assets for business expansion or business growth. So right now, the three assets that we don't have collateralized are going to be Casa Blanca Theater, the Galaxy Theater, and the Northwest Theater. That's important because those are valuable assets. You know, if I look at Casa Blanca alone, it's probably a building that's worth somewhere in the neighborhood of 30 million dollars. The other two properties, Galaxy and Northwest theaters, those are combined, probably worth close to 30 million. So I have 60 million dollars in assets that I can leverage against at some future point when the time is right, expand or grow the business.

That kind of hints at something else I was going to ask about, too, about future payment of all loans, is that Santikos obviously beyond the theaters itself, has multiple real estate holdings throughout the community. Is that something that can be leveraged for payment on loans in the future as well?

Those shopping centers have loans against them already. When I talked about Bank of San Antonio knew us very well... we refinanced a lot of our real estate debt around those shopping centers with the Bank of San Antonio at the beginning of [2020]. And that's how they got to understand our business practices and how solid the business really is. So they are already leveraged. Again, that was part of what the $200 million in debt that John left behind, that's part of it.

Looking ahead to 2021, what kind of revenue do y'all need to produce, and hope to produce, in the future in order to keep a steady glide path up for operations and for loans that are going to come due? (Even if they are very favorable in the first couple of years of terms.)

This is the crystal ball that everybody is trying to figure out, right? What is 2021 going to hold in terms of consumer behavior? Are they going to come back to the movies fast or are they going to come back in a wary way? We hope they come back recognizing that it's a safe environment. We've spent a lot of effort at Santikos, and probably the whole industry has spent a lot of effort to make sure that it's a safe environment. We believe ours is among the safest for a lot of reasons. So what we project is pretty conservative. If we can get back to 50 percent of normal by the end of 2021, that would be great. A normal year, we would make about $110 to $115 million dollars in total revenue. And if we can get back to where we're at 50 percent of normal, that's awesome. That will put us in a position where we are taking care of all of our expenses and our depreciation. And then we're able to contribute back to the Area Foundation, the net profits of our operation.

I was trying to talk about this at lunch with my family to explain everything, and I was using the Newman's Own analogy of operation.

Yeah, that's a great analogy.

I said it’s as if one day Newman’s Own stopped being able to sell pasta sauces and the salad dressing and the sales just plummeted. And so they weren't able to contribute to the foundation that Newman had set up. Is that a good analogy for all of this?

It's a perfect analogy, because, again, when John Santikos died, he had left his two businesses, the real estate business and the theater business, in a trust. Owned--to be managed by professional management, but the net profits of these operations go back all the way to the Area Foundation to be redistributed into the community. If you look at what we've done over the last couple of years since John's death, just over 63 million dollars have gone back into the community in the form of profits or capital gains, which, that's a tremendous asset to have going as a constant feed into the community. This year we will contribute zero because it was a money-losing year for this industry.

You talked about the safety measures that Santikos is leading the industry with right now. What other things is Santikos doing in order to try and bring people back to the theaters? What are your plans for 2021, as far as making people feel comfortable? I mean, vaccines are going to make people feel a lot more comfortable, I'm sure, but...

We sure hope, right? You know, there's a set of cinema safety protocols that we helped develop with the National Association of Theater Owners. So what's really interesting, Nathan, is what we were doing in March as the pandemic was getting serious. The practices that we had put in place back in March, frankly, are the same practices that we re-opened with. We were one of the first theaters in the country to reopen on May 2nd. And all those practices we put in place in terms of social distancing and basic cleanliness were not rocket science, right? I think we did all the right things, but we also put some additional measures in. We went cashless, for example, so we're not having to trade cash back and forth and have the potential spread of more things that we touch. We also partnered with Community Labs, which is a testing facility that's under the BioBridge name. We do weekly testing of 100 hundred percent of our employees for COVID-19. And the testing that we're doing is as multifaceted. It's a PCR test, which is the polymer chain reaction test, which is the gold standard for finding COVID in a person's body. We're doing weekly testing so that we can find out if people are asymptomatically carrying the disease. We have the safest workforce in town, is the way we look at this. And so we call that, Santikos is powered by a healthy workforce. We're… the only theater company in the world that's doing that. And it's proven very successful. We actually have found probably close to a couple of dozen folks that we're able to say, hey, it's time to take you out of the workforce. You need to go quarantine and get well. We'll test you again in seven to ten days. And when you test negative, we'll bring you back into the office. Another thing that we've done at the Palladium is we had-- we were right in the middle of changing out our HVAC system at the Palladium. It was all original equipment, close to 20 years old. And when we did that, we put in fairly new technology… It's called cold plasma. It's not ultraviolet light, which is kind of gimmicky, candidly. Cold plasma, really what it does is it produces an extra dose of negative ions that go into the air. Negative ions, when they attach to germs like COVID-19 or flu or other viruses, they destroy its ability to replicate. And so you put tons of negative ions in a lobby or in the theaters, the auditoriums, and it essentially takes away the virus completely. It's the safest thing that you can do in an HVAC system in terms of ensuring that you don't have viruses of any kind in your environment, to include COVID-19. That's a pretty cool thing. We've done some before and after testing of the air quality, and that is one of the more exciting things that we've discovered. And we're going to probably start rolling that out across our fleet. It cost about $50,000 dollars to do that at the Palladium and that is the safest place to go in town, as far as I'm concerned. We saw one of the cruise lines recently did an announcement about this very process. And they are kind of betting the bank on will this allow people to come back comfortably into their ships because they've discovered that it really is true science behind this, that works. So, you know, I think we've done a lot of things from employees to HVAC systems to just the basic processes and procedures that we have in place so that when people come in, it really is one of the safest places to go in public.

A few months ago when I spoke to Mr. [Rob] Lehman, [Santikos COO], I asked this question and I'm just curious about it now in light of the company's situation. The potential expansion plans that you had for your other locations, out in Leon Springs, and I think way up 281 as well… Are those completely on hold? Are they completely kiboshed? What's the scoop on that?

So we had announced a couple of intentions to acquire land. One was at Bulverde and 1604, and one was on I-10, Leon Springs area. We had land under contract. We were going to purchase and then build new theaters. Right now, building a new theater doesn't make any sense, right? We need to wait and see how people respond to this after we get past 2021 and how the vaccine manages the viruses that we know about or helps us defeat them. So what's happened? If you look at what's going on in the industry, when Rob Lehman spoke to you a couple of months ago, things have changed dramatically. We talk with our friends at NATO, National Association of Theater Owners, every week. And right now there is a forecast that 30 to 50 percent of the circuits across the country will likely fail. Economic failure. And that's a tragic thing to say, I would tell you that probably most of those that are going to fail or declare bankruptcy are small in nature. (I'll leave AMC off to the side right now. I don't know what's going to happen with those guys. They look very risky.) But I was up in Dallas with a friend of mine. The Studio Movie Grill declared bankruptcy a couple of months ago. There's lots of one theater shops, mom and pops, that are going to go under. We know that some of the other medium-sized theaters are shedding some of their theaters across the country as they try to consolidate and hunker down with their best performers. So expansion, Nathan, is going to show up in a different way. I think we have opportunity to potentially grow just by taking over other theaters that people are going to walk away from.

In other cities, or just here?

Yes. [hesitates, then laughter] Yes. So we're exploring a lot of opportunity right now. I'm not saying that anything's a done deal, but we're evaluating both… in and outside of the San Antonio city limits. Opportunities for us to take our business model, which we've gotten pretty well-tuned right now… Can we take that and run that into a couple other theaters and still not distract us from our mission, of what we do here in the San Antonio area, but maybe find a multiplier effect, if you will, expand our ability to generate income for the Area Foundation? So, yeah, we're taking that pretty seriously. That's the most exciting thing we're looking at right now. And I hope to be able to tell you maybe six to eight weeks roughly, that we're going to lock in on a couple of those.

That is exciting. And it also makes me think, though, that, looking ahead, would that mean that the Area Foundation then expands its reach to these other communities that you potentially, theoretically could be in?

Yeah, I probably wouldn't suggest that's going to happen. The Area Foundation is very... the Area Foundation and Santikos are two independent things. I'm a for-profit business and Santikos, we just happen to take all of our net income and give that up through the John L. Santikos Charitable Foundation to the Area Foundation. I think they're pretty focused on the area of San Antonio.

So there might be different marketing for those communities because Santikos marketing here is very much, you buy the Coke and it goes to goes back into the hospitals here. But if it's in Forney, Texas or wherever, then it obviously wouldn't be that same message up there.

You know of something in Forney, Texas? [laughs]

It was the first city that came to my mind for some weird reason!

You're right. We would we would take a different marketing message there, but the company of Santikos would still be operating like we do. We just wouldn't be messaging that local community what it is, where their money's going is to San Antonio, right? But I think, you know, we've had a lot of people reach out to us. There's a lot of operators in the Austin area and they call us. They said, “We like your model. We like what you guys stand for. Do you want to come operate this theater in Austin?” And the answer is no, I don't. [laughs]

Tim, what keeps you up at night?

[Laughs] There's a lot that keeps me up at night, Nathan! So getting this loan in place… was a big deal. Last night, I was up at 3:30, and I read about 200 pages of the bill that just passed, the COVID relief bill. It's only 5,600 pages long, so I'm just getting started. But there's a big component in there that will address theaters. And so 15 billion dollars was carved out for what's called Save Our Stages and Save Our Cinemas. Senator [John] Cornyn was one of the key sponsors of this part of the bill. And in there, it pretty much outlines Santikos is going to be qualified to participate in this grant. What we did with Main Street Lending as a traditional loan from the Federal Reserve System, this COVID relief bill is the first time we'll be able to participate in any of the federal stimulus that's going in. And I'm very excited about that, because that puts us on even firmer financial footing and paying for some of our expenses that we've incurred without the revenue to come with that. So I think what's kept me up mostly is finding a way to navigate all this and keep Santikos not only solvent…. That sounds like a pathetic word, but strong enough to come out of this whole COVID scenario stronger on the other side and continue to grow and contribute to this community. That's what I've been really focused on with our entire thing. We have an amazing team at Santikos and I think that we've navigated this very well. That's the primary thing I've been worried about.

I also happen to be the mayor of Boerne... The other half of my day is focused on making sure that that community stays safe and as an elected official, trying to do what I can for the people in that community. So this has been a tough year. To have either one of these roles is not trivial and to have both of them has been brutal. I say that I don't get to turn off because while I'm here at Santikos, I'm dealing with it. When I go back to Boerne, where I live, I have to deal with it. And thank god I have a wife who's awesome. (Make sure you have that on the audio there!)

The other thing [is], now that we have all this stuff that's coming together for us, is really just finding innovative, creative ways to evolve Santikos into something that maybe John Santikos could have never envisioned. I don't think John Santikos ever, ever would have guessed a pandemic like this would affect this business as it has. So now we have to really be creative and innovative as the world is forever changed. Santikos is not exempt from that. What do we look like, operate like? What do people want to experience as they go out and get entertainment? We're trying lots of different things. We're doing these private auditorium rentals and we have over 500 rented over the [Christmas holidays]. So clearly, people want to get out of the house. They want to have a cool experience. They want to have this gigantic screen where they're experiencing something like “Wonder Woman” with incredible sound that you just can't get at your house. Do we turn these into, you know, you name what you want to do at our venue, but we have the coolest technology? We get to innovate right now. And that's the fun part.

I'm a big proponent of the theatrical experience. I do have Netflix and I do have Disney Plus at home. But there are many people are just fine watching things at home. How is Santikos trying to counter streaming, or do you feel that you can basically live in tandem with the streaming world that is now being accelerated by COVID-19?

This question has been around for a while. And if you look at what's happened in the theatrical or the exhibitor world, you know, 2017, 18 and 19 were the three best years in the history of the movie business from a total revenue standpoint. So that's pre-COVID, of course. There is data that would suggest guys like you like content. You watch it at home, and then you're also going to go to the movie theater and you're going to watch it there, too. And the data that we have from there's a study from KPMG done over the last two years that shows the exact same thing. If you like content, you go to the movies more than anybody. And so the streamers, those guys like to go to the movies. And we consistently see that. If you look at the population of the U.S. with the new census that just came out, roughly 350 million, about 10 percent of those people go to the movies. And that number has been relatively flat for the last many years. I don't know what's going to happen after this year, but let's just look at what happens when we weren't able to go to the movies at the theaters. Disney, Universal, they tried to go straight to streaming. And did you see all the huge headlines about how much money they've made? No--because they haven't! So when Disney took "Mulan" and they asked you to pay 29 dollars to watch it inside of your house… Incredible, right?

No, I just waited till December!

Yeah, wait till December when it's when it's part of [Disney Plus]. Right. But what Disney said in their earnings call about two weeks ago, they came out and very, very publicly stated they are not going to take things straight to streaming because they cannot make as much money. And that's very clear. The subscriber model, if you look at what the industry analysts are saying about it, the subscription-based streaming services might be profitable in the year 2025 or 2026. So where do the studios make their money? In exhibition. If you look at what Warner Bros. announced a couple of weeks ago, and I talk to the top of the house at Warner Bros. almost every week, they made that announcement that in 2021 they're going to simultaneously release in the theaters and on HBO Max. They're just trying to find revenue. They've been beaten up mightily by all the director guilds, the actor guilds. They've all come after them heavily. Why? Because nobody makes money when you go to streaming. The studios are doing good just to break even. Their investors in their movies are not going to get the same kind of return that they've had prior to COVID.

Grad Slam 2020 celebrates graduates

Twang, makers of products like Cafe Zuca, will be hosting Grad Slam 2020 this Saturday. Photo: Twang, used with permission. 

Local San Antonio companies Twang,Rico’s, Pizza Patrón, San Antonio Current, Santikos, Wide Awake Creative, San Antonio Museum of Science and Technology and Port San Antonio are joining together to help celebrate recent graduates that may have had their graduation…