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Will Leaseback Rewrite Script?

The sale of the DreamWorks Animation SKG Inc. campus in Glendale will buy the studio some time to turn around its struggling film operation, even though the sale price was a bit under value. Last month, DreamWorks sold its 14-acre Tuscan-inspired campus for $185 million to the investment arm of SunTrust Banks Inc., an Atlanta bank holding company, and then signed a 20-year lease to stay on the property. Company officials said carrying such a large unencumbered piece of real estate on the balance sheet did not make sense for a media company. Tuna Amobi, an equity analyst who follows DreamWorks at S&P Capital IQ in New York, said the decision relieves some pressure on the company, which has suffered a rash of poor films. “From a financial perspective it helps liquidity. They will not have that huge overhead,” Amobi said. At the end of last year, the company had $59 million in cash and $432 million in receivables. The company had an annual net loss of $300 million, with $248 million in the fourth quarter. That included a $57 million write down for flops “Mr. Peabody & Sherman” and “Penguins of Madagascar,” plus a $55 million charge in connection with layoffs and $156 million spent on projects that it cancelled. On the plus side, the company recently secured an additional $50 million on credit, upping the total to $450, with $215 million already drawn. At the time of the sale, analyst Rich Greenfield at BTIG Inc. in New York wrote to investors that he didn’t have confidence in DreamWorks’ liquidity beyond 2018. On the other hand, three years is a long time in Hollywood. Eric Wold, a senior analyst in the San Francisco office of B. Riley & Co., a Los Angeles investment bank, said liquidity is not an immediate issue because, despite its movie problems, DreamWorks’ consumer products and episodic television shows on Nickelodeon, Cartoon Network and Netflix continue to perform. In January, the studio announced a restructuring of its feature film division, including layoffs of up to 500 employees and the closure of its Redwood City facility. It also is reducing its annual output from three to two films. Additionally, two top executives left – the chief operating office and chief marketing officer. DreamWorks is releasing just one film this year, “Home,” which comes to theaters in late March. Wold and Amobi at S&P Capital, who both rate DreamWorks a “buy,” expect it will deliver a mediocre performance. “It may lose money and when it does it should not be a surprise,” Wold said. The studio announced the campus sale on Feb. 24 and two days later disclosed the buyer as DW Glendale CA Landlord LLC, a subsidiary of SunTrust Bank.. The lease starts at $13.2 million and increases 1.5 percent annually. DreamWorks has four five-year options after the initial 20-year period ends. The Flower Street campus totals 10 buildings with 400,000 square feet and was built in 1997. The facility features a no-cost cafeteria, water fountains, koi ponds and walking paths. William R. Boyd, senior managing director at Charles Dunn Co. Inc. in Glendale, said the sale price for the property was lower than what DreamWorks could have obtained if it had shopped around for buyers. On the flip side, the studio negotiated a tenant-friendly lease with yearly increases about half of market value. “The market typically includes annual increases of 3 percent,” he said. “The fact that they’re getting 1.5 percent shows that the sellers are writing their own lease.” Amobi characterized the sale and lease-back as a way for DreamWorks to “press the reset button” to have a fighting chance to see financial improvement in 2016, when the studio begins its two-films-a-year schedule. “It was inevitable to take dramatic steps to improve the chances for future success,” he said. Staff Reporter Karen Klein contributed to this story.

Mark Madler
Mark Madler
Mark R. Madler covers aviation & aerospace, manufacturing, technology, automotive & transportation, media & entertainment and the Antelope Valley. He joined the company in February 2006. Madler previously worked as a reporter for the Burbank Leader. Before that, he was a reporter for the City News Bureau of Chicago and several daily newspapers in the suburban Chicago area. He has a bachelor’s of science degree in journalism from the University of Illinois, Urbana-Champaign.

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