March Q1 2012 results of movie theater operator/owner and real estate developer, Reading International, Inc. (NASDAQ:RDI) (NASDAQ:RDIB) were impressive, illustrating another quarter of growth in revenues, operating income and operating margin vs. prior year. A very strong series of films during the quarter not only heated up the screens and filled seats at Reading’s many cinema chains but also helped sell a lot of high-margin popcorn and soda.
Historical background on Reading, now a $254MM LTM revenue, but only a $124MM market cap company, is available in this past Just One Stock interview and periodic progress of Reading’s many cinema and real estate activities can be tracked in these other Seeking Alpha articles on Reading. Despite the company’s consistent delivery of operating performance and its large cinema market shares in Australia (#4), New Zealand (#3) and the United States (#11), Reading still lacks coverage by even a single sell-side entertainment, consumer non-durable, or real estate industry analyst.
Notwithstanding some recent appreciation in the Reading International, Inc. (NASDAQ:RDI) stock price, the lack of other secondary analysis of this relatively undiscovered company contributes to RDI still trading at a bigger discount to book value/share than any of the three larger US publicly-traded theater exhibitors, Regal Entertainment Group (NYSE:RGC), Cinemark Holdings, Inc. (NYSE:CNK) and Carmike Cinemas, Inc. (NASDAQ:CKEC).
As Reading’s strong growth in sustainable cash flows and its superior holdings of geographically diversified real estate with sizable unrealized appreciation become discovered, the “value gap” that exists in RDI shares should narrow. Reading’s detailed March Q1 2012 10-Q can be found here and certain salient findings of this filing are discussed, below.
Box Office Has Started Strong in Q1 With Great Prospects For Rest of 2012
According to Box Office Mojo, Domestic Q1 2012 total movie grosses were up over 23% from the prior year with Lions Gate Entertainment Corp. (NYSE:LGF)’s blockbuster, “The Hunger Games” leading the charge. The top three grossing films for Q1 in Reading’s worldwide cinema circuit were Weinstein Company’s “The Artist,” “The Hunger Games,” and Warner Bros.’ (TWX) “Sherlock Holmes: Game of Shadows.” Note that another hit film in Q1, Comcast Corporation (NASDAQ:CMCSA)’s “Dr. Seuss’ The Lorax” did not open in Reading’s Australia and New Zealand markets until March 29.
Q2 Box office has already started off strong, not only with “Dr. Seuss’ The Lorax” in Australia and New Zealand for Reading, but also The Walt Disney Company (NYSE:DIS) Marvel’s “The Avengers,” which is breaking several summer and opening box office records here and abroad. The movie release schedule for the remainder of 2012 contains a greater number of 3D movies than 2011 and several well-known ‘franchise’ blockbusters, including the next installment in Warner Bros’ Batman series, “The Dark Knight Rises,” scheduled for release in early Q3.
Reading’s overall Q1 2012 revenues grew +15.5% from prior year, primarily driven by its cinema segment performance in the US.Revenues of the company’s large Cinema segment, which produces the bulk of Reading’s cash flows, grew by $7.9MM or 16% y/y, while its smaller Real Estate segment revenues grew $0.4MM y/y or 10.1%.
Last year, Reading’s strong international box office growth fueled performance. In addition, Reading’s relatively higher mix of international screens has contributed to Reading’s cinema revenue growth often exceeding all three of the larger US publicly-traded theater exhibitors – Regal Cinemas, Cinemark Holdings and Carmike Cinemas.
However, this quarter, Reading’s cinema segment revenue growth was primarily the result of double-digit increases in US attendance (from a strong film slate and a few additional screens) plus modest Aussie and New Zealand currency moves. Attendance in Australia was relatively flat with a later opening of “Dr. Seuss’ The Lorax,” a strong 2011 to comp against, and a few low-profit screens closed. Real Estate segment revenue growth was the result of higher rents in Australia and New Zealand and modest currency improvement.
As illustrated in the table, below, Reading’s Global Cinema Revenue growth was “held back” to 16% by its substantial mix of international cinema revenue that only grew 6.4%. Fellow international exhibitor, Cinemark Holdings also had its Global Cinema Revenue growth muted by lower international revenue growth as well. Noteworthy is the fact that Reading’s Domestic Cinema Revenue growth exceeded the #1 US exhibitor, Regal Cinemas and #3 Cinemark Holdings (Carmike is #4 and private AMC Entertainment is #2.)
| Q1- March 2012 | RDI | CNK | RGC | CKEC |
| Y/Y Rev. Growth | ||||
| Domestic Cinema Revenue | 27.8% | 24.3% | 20.0% | 36.6% |
| Global Cinema Revenue (including US) | 16.0% | 19.8% | 20.0% | 36.6% |
| Cinema Revenue Mix | ||||
| Domestic % | 49.5% | 71.0% | 100.0% | 100.0% |
| International % | 51.5% | 29.0% | 0.0% | 0.0% |
Q1’s Operating Income (EBIT) jumped 149% from prior year to $4.9MM. Adjusted Operating EBITDA (Operating Income + Dptn/Amort) of $9.1MM was 49% higher than prior year’s Operating EBITDA. Reading’s cash flow growth vs. prior year came from both its Cinema and Real estate segments. Cinema Segment margins jumped from the prior year, benefiting from operating leverage on fuller theaters, improved film rental margins from extended runs of some popular films and increased revenue mix from concessions, which carry much higher margin than admissions. Real estate margins slightly narrowed on higher operating expenses, primarily in the US, related to increased maintenance, repairs and legal costs.
Q1’s net loss of $0.2MM was a $2.2 improvement over prior year. While Q1’s pre-tax income was positive, a much higher Australian tax provision of $1.0MM created the quarter’s loss.
Reading’s Hard Asset Balance Sheet More Compelling Than Peers
Reading’s increased book value of $5.55/share is up 13.6% from prior year, with Australian and New Zealand 3/31/12 currency exchange rates up y/y only 0.1% and 7.3%, respectively. As explained in the Just One Stock interview, I believe Reading’s book value greatly understates the current fair market value of Reading’s Australian, New Zealand, New York and Chicago real estate, much of which has appreciated in value over more than a decade of ownership, from population growth, up-zoning, and in some instances, development into rent-generating parcels.
In addition to stated book value and some substantial amount of unrealized gain embedded in Reading’s long-held real estate, as disclosed in the footnotes of Reading’s 2011 10-K, at December 31, 2011, Reading had $95.1MM in tax NOLs ($45.9MM and $15.8 MM of Australian and New Zealand tax NOLs, without any expiration date, respectively, and $33.4MM of US NOL’s not expiring until at least 2025.) that should shield future real estate sales gains and pre-tax income growth from taxation for several years.
The table, updated below for Q1 results, illustrates that Reading’s net debt to total assets % is amongst the industry’s most conservative, and much safer than Regal Cinemas’ and Carmike Cinemas’ high leverage ratios. In fact, as of March 31, 2012, Regal and Carmike both have negative book value from sizable past losses, restructurings and distributions in excess of income. However, what makes the table below so compelling is that Reading’s true asset and book value is likely even higher because of sizable unrealized appreciation in the Company’s real estate.
| Q1- March 31, 2012 | RDI | CNK | RGC | CKEC |
| Balance Sheet Comparison | ||||
| Price* | $5.43 | $24.07 | $14.43 | $15.39 |
| P/B Ratio | 0.9 | 2.6 | NA | NA |
| Net Debt ($mm) | $176.0 | $1,183.5 | $1,693.9 | $298.4 |
| Total Assets ($mm) | $431.5 | $3,574.7 | $2,307.0 | $420.8 |
| Net Debt/Total Assets % | 41% | 33% | 73% | 71% |
| * Closing prices as of 04/10/12, all balance sheet items from 3/31/12 10-Q. | ||||
Reading finished the March quarter with substantial liquidity. On March 31, 2012, Reading had cash and marketable securities of $31.5MM plus a combined $25.7MM of undrawn availability on its several lines of credit. Reading’s 3/31/12 debt, net of the above-mentioned cash is $175.9MM, $18.3MM lower than prior year, as a result of continued strong cash flow generation
Other 10-Q Disclosures Of Note
Reading successfully renewed its New Zealand credit facility, previously maturing in March 2012, for another 3-years, now maturing March 31, 2015.
Reading sold three contiguous properties, comprising 1.1 acres in the Taringa suburb of Brisbane, Australia, which had failed to obtain desired up-zoning for a planned office development, for $1.9MM.
Reading acquired a 202-acre agricultural property in Coachella, California that has already been re-zoned for the development of up to 843 single-family residential units. The property was acquired at a foreclosure auction for $5.5MM, with 50% of these funds provided by Reading’s Chairman/CEO, James Cotter, to create a 50/50 JV LLC, that was approved by the Conflicts Committee of Reading’s Board. While the property was acquired as a long-term investment in developable land, Reading intends to fairly quickly make this parcel cash flow-generating, in the interim, as an agricultural rental.
In February 2012, Reading acquired a promissory note, currently in default, for $1.8MM that Reading believes to be indirectly secured by the 50% membership interest in the Angelika Film Center, LLC (New York City) that Reading sold years ago for a very high valuation multiple. The note was acquired from the original lender with the intention of satisfying the debt in a manner that increases Reading’s ownership in Angelika at an attractive valuation.
Reading’s Business Plan: Adding Value To Hard Assets
The business plan set forth on page 44 of Reading’s 2011 10-K describes a unique strategy amongst public companies of blending the cash-generating capabilities of a cinema operation with the investment and development opportunities of a real estate developer. Several of Reading’s parcels have already been or are planned to be developed into entertainment-themed retail centers (ETRCs) where a large Reading multiplex serves as anchor tenant and Reading remains a synergistic landlord. [The Marcus Corporation (NYSE:MCS)’s business plan may seem close to Reading’s strategy. However, almost all of Marcus’ real estate is already developed and as hotels, with very little synergy to its cinemas.]
The first place to begin analyzing and seeing the enormous hard asset value already embedded in Reading’s balance sheet, that doesn’t exist with any other exhibitor, is the company’s very detailed 10-Ks compiled over several years, which can be found here. A thorough discussion of Reading’s properties takes place in the most recently filed 2011 10-K on pages 17 through 23. In addition, this slide presentation, made at a November 2011 investment conference in San Diego, shows many pictures of Reading’s sizable real estate holdings. (There was also this summary 2-page investor information handout on Reading from the conference that may be useful to some analysts.)
Asset Sales/Development Goals
There was very little commentary in the Q1 March 2012 10-Q incremental to last quarter’s 2011 10-K disclosures regarding asset sales and development plans. These plans will likely be a topic of discussion at Reading’s upcoming 2012 Annual Meeting to be held at the company’s headquarters in Los Angeles on May 17, 2012.
New York Real Estate – While Reading owns other smaller parcels in Manhattan, New York City, Reading’s 10-K disclosed the company’s goal to sell its Cinemas 1, 2 & 3 property and redevelop its Union Square Theater property, both very valuable parcels that the company has estimated to have values “substantially in excess of their book value.” On Reading’s 12/31/11 balance sheet, the gross asset values of the Cinemas 1, 2 & 3 and Union Square Theater properties are listed at only $23.5MM and $9MM, respectively.
Burwood Square (Melbourne), Australia – Previously, this Seeking Alpha article, reporting on Reading’s May 2011 Annual Meeting, discussed Reading’s plans and methods to monetize and develop its large 51-acre Burwood Square development parcel [PDF] in Melbourne Australia. At that Annual Meeting and via Reading’s website, the company provided a color-coded Burwood Square property map, showing each of the parcel’s three zoned segments: residential [green], residential/commercial [blue], and retail/entertainment [yellow] and Reading’s plan to monetize or develop these zones separately, rather than all at once, to maximize the parcel’s overall value.
While we don’t know much about the delay in getting some deal(s) consummated on this large and valuable parcel, we believe the company’s intent to monetize parts of this asset in the near-term remains strong. The Q1 March 2012 10-Q did not disclose any further progress in monetizing portions of Burwood Square but the following language did reaffirm Reading’s goal to monetize parts of Burwood Square:
We continue to consider the potential sale of certain of our real estate assets. …. Also, we continue to consider various methods to monetize all or at least the residential portion of our Burwood development site and our Lake Taupo properties even though they cannot be classified as a property held for sale pursuant to ASC 360-10-45.
Note that only six weeks ago, the 2011 10-K also stated regarding Burwood Square “discussions with qualified buyers continue, and it remains our plan to monetize at least the residential portions of this property.”
Furthermore, the 10-K repeated prior language of, “based on recent valuations”, Reading believes “the fair market value of the property less costs to sell is greater than the current carrying value” of $53.4 million (AUS$52.1 million.)
It should be noted this valuable Burwood parcel remains completely mortgage free. Thus, all sales proceeds could provide incremental debt reduction and/or capital to develop the property’s [yellow] entertainment and retail zone. While the timing of selling portions of this parcel and their respective values are unknown, a May 24, 2011 Reading press release disclosed that CBRE valued the 31- to 34-acre residential [green] zone at AUS$1.7MM/acre [close to covering the stated book value of the entireparcel] and the 6+ acres of the residential/commercial [blue] zone at AUS$11.5MM. The final approximately 11-acres is slated to be an entertainment and retail zone [yellow] that Reading will develop directly either on its own or in JV.
Activities on other development parcels – In addition to its goal to sell its Lake Taupo New Zealand parcel, Reading is actively pursuing the development of phase II of its Courtenay Central ETRC property in Wellington, New Zealand. Also, the 10-K disclosed that recent up-zoning changes in the new Structure Plan adopted for the Moonee Ponds (Melbourne) Activity Centre benefited Reading’s 3.3-acre parcel by increasing the density permitted to be developed on this site from 10- to 16-stories.
Investment Thesis
Still trading at a substantial discount to a book value greatly understating the value of its sizable real estate holdings, Reading International’s favorable internationally diversified movie exhibition growth profile and conservative balance sheet make for a compelling risk/reward investment.
Disclosure: I am long RDI, RDIB.
Additional disclosure: Funds I manage are long RDI, RDIB, CNK June 20 puts, and short CNK June 17.5 puts, CKEC June 15 calls and LGF June 11 puts. These funds or its affiliates may buy or sell securities of these issuers at any time.
