This article originally appeared in CoStar News written by Candace Carlisle on August 4, 2020, quoting Eric Horn. It is reprinted here with permission from CoStar News.
A U.S. bankruptcy judge granted approval for the parent of Chuck E. Cheese and Peter Piper Pizza to not pay rent for the time being as the company negotiates with landlords in Chapter 11 bankruptcy, making it at least the third national retailer in recent months to forgo payments as landlords face reduced revenue in the pandemic.
The court-approved decision allows CEC Entertainment, the Irving, Texas-based parent company with more than 500 locations in the United States and Canada known for an animated rodent mascot and for hosting pizza-filled parties, to sidestep rent for another 21 days. It follows in the footsteps of bankruptcy judges allowing department store retailer J.C. Penney and home goods retailer Pier 1 Imports to postpone making rent as they negotiate with landlords.
Landlords could be thrown off balance by the postponed rental payments, particularly if they have multiple tenants closing their business or seeking to renegotiate leases, said Eric Horn, an attorney at A.Y. Strauss, a New Jersey-based law firm. Horn, who isn’t involved in the CEC Entertainment bankruptcy case, but is familiar with the proceedings and the landlord attorney’s concerns, expects as a result of the rent decisions that more precautions will be taken in underwriting properties or drawing up leases in the future to address events such as a potential pandemic.
“In these situations, where a company has a lot of boxes and brick-and-mortar retail is the basis of their operation, real estate is their largest expense,” Horn said in an interview. “It’s the first thing they will cut back on, especially if they are not using their space. It’s the largest line item outside of secured creditors and it’s the quickest and easiest expense to cut.”
The CEC Entertainment ruling by Judge Marvin Isgur in the U.S. Bankruptcy Court for the Southern District of Texas’ Houston division comes after the company already owes more than $20 million in lease payments to landlords for July and August rents. Even though postponing rent could negatively impact landlords, Judge Isgur said he didn’t see another alternative and it was unlikely the space could be leased to a new retail tenant during a pandemic.
Only about 300 of CEC Entertainment’s locations have reopened from government-mandated closings related to the pandemic, with only about 90 of those venues operating at a capacity of at least 50%, with the remainder operating at an even smaller fraction of its operating capacity. CEC Entertainment rejected 54 leases through the court and negotiations with landlords have been underway since June with additional permanent venue closings expected.
The company has had financial implications with not all of its locations being open, said Chad Coben, a senior managing director of FTI Consulting, a consultant and expert witness working on behalf of CEC Entertainment, during the hearing.
“We are operating below original [financial] projections we provided to various parties on the onset of this case,” Coben said, citing rolled back government mandates in Texas and California as the cause of some of those shortfalls.
In Texas, CEC Entertainment’s 61 venues can only operate at 50% capacity on the dine-in part of its business, which accounts for about 45% of its business. The remaining 55% of the business is tied to the arcades and gaming. Most of the company’s temporarily closed venue locations are in California, he told the court.
“We are only operating at a fraction of what we did in 2019,” Coben said.
To cut operational costs, CEC Entertainment laid off about 65% of its corporate workforce in the Dallas area and furloughed most of its hourly employees, Coben said. The company has also been reducing its variable costs and negotiating with about 400 landlords throughout the country, with its real estate adviser, Hilco Real Estate. Those negotiations are still active, and the company has yet to determine which leases will remain as part of the Chuck E. Cheese and Peter Piper Pizza business, he added.
“It’s a heavy lift to reach out and have a productive discussion with each of the landlords, but Hilco has been trying to renegotiate leases across the board,” Coben said during the hearing. “This will be an important component to the successful reorganization for debtors.”
In the hearing, Ivan Gold, one of the attorneys representing landlords, told the bankruptcy judge he was concerned that CEC Entertainment wouldn’t have the liquidity toward the end of the bankruptcy process to pay landlords the ever-growing pile of rents owed on leased brick-and-mortar venues. He cited the recent confirmation hearing of Pier 1’s bankruptcy case, in which landlords are still waiting for rent payments from April and May. The home goods retailer recently parted with its last piece of real estate.
The judge declined to make a decision Monday on what rents CEC Entertainment will owe once the 21 days are up Aug. 24, but told the court he planned to take great care with the expected decision ahead.
Much of the future of CEC Entertainment is tied to the return of prepandemic consumer behavior, including the return of children’s crowded birthday parties in enclosed spaces, full capacity restaurants and arcade entertainment operations as all temporarily closed venues reopen, Coben said. He added that the possible return of consumer behavior is difficult to predict given there’s no vaccine or other preventative treatment for COVID-19.
As for other creditors, Coben, a consultant for CEC Entertainment, said they were being paid for their goods and services during the bankruptcy process.