Someone very famous once told me, “Jill, always remember you’re a numbers gal.” Every entertainment-infused real estate development has industry standard numbers that equate to profitability. All retail, dining, entertainment attractions, public assembly, hospitality, sports and cultural facilities follow set rules. So, for those of you who aren’t throwing in the towel yet, here are some simple rules and some complications, based on a couple of very simple formulas:
- Annual Attendance = Gross Market Size x Market Penetration Rate
- Design Day Attendance = the Percent of Annual Attendance seen on any of the 15 to 20 busiest days of the year.
- Peak On-Site = the Length of Stay relative to the Period Open, accounting for arrival and departure patterns.
- Gross Revenue = Annual Attendance x Per Capita Revenue for Admission, Retail, Food & Beverage, Merchandise, and Ancillary Sources of Revenue
- Net Operating Income or EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortization) = Gross Revenue minus Projected Expenses for each year the project is open. The formula normally refers to a stabilized year.
- Warranted Investment = EBDITA x Industry Standard Years to Payback. (For non-entertainment real estate projects this number is the basis for the capitalization rate.)
In my experience, the throughput’s the driver, followed by per caps. Since throughput is being curtailed by up to 75% in some industries including theme parks, movies, and restaurants, this is a major issue.
Therefore, any entertainment real estate project hoping to make it through to the other side (wherever that lands) must look to increase per capita or lower development and/or operating costs. That’s a tall order.
Another way to keep NOI thriving is through development of other sources of business, in other words, diversification. Disney is doing a particularly good job: an example, they will be releasing the digital version of “Hamilton” with the original Broadway case on Disney + within the next 60 days. Theme parks are being decimated so the company is diversifying into creative and original digital offerings.
I don’t really have any easy answer because this is an evolving situation that changes daily. What I can say will absolute certainty is that leaving out necessary planning and development steps will result in failure. During the last recession, we had a few clients who didn’t plan enough parking for design day on-site needs, to save money. And sadly, they had to fix this after the fact, spending millions of dollars of cap ex in subsequent years.
There is lots of work to do to create the new business model. My clients and friends should be working on this right now! What are you doing? How are you developing new capital and operating models? Let us know, and together we can save our industry!
1/ Throughput is the annual number of guests visiting a project on a given day, month, week, or year.