Reading International (RDI)’s Q2 2015: Set Records, Full Of News

Reading International (RDI)’s Q2 2015: Set Records, Full Of News

Reading International (RDI)’s Q2 2015: Set Records, Full Of News by Andrew Shapiro, Seeking Alpha


  • Movie theater operator and real estate developer, Reading International just announced the best revenue, operating income, and EBITDA in the company’s history.
  • Reading continues its operational growth, de-leveraging a conservative balance sheet and achieving milestones in the redevelopment and monetization of the company’s undervalued, underutilized real estate.
  • As Reading converts developments into cash flow, appreciation in the real estate becomes easier for investors to value, thus closing the substantial “value gap” in the company’s share price.
  • Reading’s cinema segment continues its growth with several new builds planned in both the US and the New Zealand/Australia region.
  • An escalating fight amongst Cotter family siblings over their father’s estate and voting control of Reading presents new opportunities to unlock value.

Since my June 2015 article on global movie theater operator and real estate developer, Reading International (see “In A Year Of Major Events For Reading International, Wanda’s Purchase Of Hoyts Turns Our Head“), achievements continue. The company announced very strong Q2 2015 operating results. According to Reading’s Q2 2015 earnings press release (including emphasis), “Revenue, operating income, and earnings before interest, taxes and depreciation, and amortization (“EBITDA“) for the second quarter represent the best results in the history of the Company.”

Not only did Reading deliver strong operating results in Q2, but the company continued to improve its conservative balance sheet with a substantial reduction of net debt to only $81.2MM after completing the major sale of the company’s Moonee Ponds development parcel in Melbourne, Australia. Additionally, Reading’s New Zealand facilities and its Union Square mortgage were refinanced during the quarter with increased capacities while still extending maturity dates and lowering interest costs.

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Last year, Reading sold its very large undeveloped Melbourne parcel, Burwood Square for AUD$65MM in an installment sale. As of Reading’s June 30, 2015 balance sheet, despite the sale having closed and ownership and title transferred to the REIT buyer, AUD$58.5MM of proceeds to be collected from this sale are listed as “Land Held For Sale,” which will further pay down Reading’s declining debt levels.

A $10MM stock buyback program Reading announced after its 2014 annual meeting continues with several hundred thousand shares having been repurchased to date.

Reading Real Estate Development Milestones During Q2 2015

On August 6, 2015, Reading provided an update on the development progress of four separate real estate parcels/projects in the US, New Zealand and Australia.

Union Square Theatre (Manhattan New York City): In March 2015, Reading obtained New York Landmarks Commission authorization to redevelop the property with approximately 23,000 additional square feet of rentable space to the current 46,000 square foot building. This greatly enhanced the project’s prospective value. [See photo, below] Reading recently entered into a Development Management Agreement with Edifice Real Estate Partners, LLC, to assist in the supervision and administration of the project and also entered into a real estate brokerage agreement with Newmark Grubb Knight Frank to serve as exclusive marketing agent. Reading intends to commence development in Q1 2016.

Cinemas 1, 2 & 3 (Manhattan, New York City): Reading recently received the consent of Sutton Hill LLC’s minority member (a Cotter family entity) to the redevelopment of the property. Reading’s current plans are to redevelop the property as a mixed use retail and residential and/or hotel property.

New Market Centre expansion and multiplex (Brisbane, Australia): Reading received local Planning Council approval in June 2015 for design and construction of an eight-screen cinema complex. The approval also includes 10,000 square feet of additional specialty retail space to be located below the theater and additional mezzanine level parking. Reading intends to begin construction in Q2 2016 for projected opening Q4 2017 at an estimated total cost of $27.0 million (AU$35.0 million)

Courtenay Central entertainment center expansion (Wellington, New Zealand): Reading received local City Council planning approval in May 2015 for a supermarket development. Note, the previously announced Countdown supermarket development with an estimated cost of $11.5 million (NZ$17.0 million) had been delayed by severe damage to car park caused from Wellington earthquake.

In an August 2013 Seeking Alpha article on Reading, I discussed a valuation of at least $100MM for just the two above-mentioned New York City redevelopment projects, Cinema 1,2 & 3 and Union Square, combined. Since 2013, New York City real estate values have continued to skyrocket and Reading’s plan to further redevelop these parcels creates additional long-term value for Reading and its shareholders. Any partial or complete sale of these properties would be reflected more immediately in Reading’s stock price. (See an August 13, 2012 Barron’s article, entitled “Popcorn and Property” [found here if free access is still operable].)

Reading’s Growing Global Cinema Business Not Fairly Valued In Stock Price

While RDI’s share price does not adequately reflect the underlying value of the company’s geographically diverse real estate assets. My recent Seeking Alpha article, entitled “In A Year Of Major Events For Reading International, Wanda’s Purchase Of Hoyts Turns Our Head, discussed an estimated $1.95MM per-screen valuation Wanda paid for large Australian/New Zealand exhibitor, Hoyts Group. Such a comparable valuation, in a region where Reading is the 4th largest movie exhibitor in Australia and 3rd largest New Zealand, right behind Hoyts, implies a $12-$14/share value (RDI’s current stock price) for Reading’s Aussie/NZ cinema segment alone. sizable undervaluation of Reading’s overall cinema assets in that market and the United States. This cinema segment undervaluation is above and beyond the sizable appreciation embedded in Reading’s global real estate cited in my prior Seeking Alpha articles on Reading.

Reading has started the development of several new 8-plex cinemas in New Lynn, (Auckland) NZ, West Oahu, Hawaii, Washington, DC’s Union Market and, as mentioned above, at New Market Centre in Brisbane, and the company is also repositioning a multiplex into a luxury Angelika Film Center in San Diego, CA.

At present prices for RDI shares, Reading’s Aus/NZ real estate (including the proceeds being received for the sale of Burwood Square), Reading’s US real estate (including the embedded appreciated value in both Union Square and Cinemas 1,2&3) and Reading’s growing cinema operations are not presently fully valued in the price for RDI shares.

There have been two articles written on Reading by other authors over the past year, one on Value Investors Club in November, 2014 and another, on Seeking Alpha in March entitled, “Reading International Prepares To Unlock Manhattan Real Estate Value.” They assigned values for RDI at $23-$26/share, and $20-22/share, respectively, prior to recent announcements and achievements. Perhaps these authors would now value RDI shares even higher?

Cotter Family Estate Fight Poses New Catalyst For Unlocking Value

In September 2014, Reading’s longtime Chairman, CEO and controlling shareholder, James J. Cotter, Sr., passed away leaving a sizable estate. This has become the subject of a dispute between his daughters, Ellen and Margaret Cotter and their younger brother, James Cotter, Jr.

With James Cotter, Jr. designated several years ago to be successor CEO, all three of Mr. Cotter’s children, long-time Reading executives and/or board members, had presumably been pursuing the same value-unlocking roadmap that their father had been implementing. Cotter, Jr. brought in outside managerial expertise, hiring an in-house General Counsel (October 2014) and a new CFO (April 2015), both with substantial real estate experience.

However, in February 2015, Margaret and Ellen Cotter, initiated litigation regarding control of their father’s estate, particularly that of Reading’s Class B voting shares (NASDAQ:RDIB). According to a Los Angeles Superior Court filing in the case, “In re James J Cotter Living Trust dated August 1, 2000,” Margaret and Ellen are seeking to invalidate a 2014 amendment to Cotter, Sr.’s Living Trust that had elevated then Reading CEO, James Cotter, Jr., to be a successor co-trustee, joining Margaret who prior thereto was sole successor trustee. This case is important to Reading shareholders because, this trust will eventually hold all of the Cotter family’s RDIB shares (approximately 68% of total current RDIB shares outstanding). Under California trust law, many actions of the Trust require unanimous approval of all trustees. Thus as Co-Trustee, Cotter Jr. presently has veto rights over actions that Margaret might otherwise have wanted to take unilaterally.

In June, Reading announced that Ellen Cotter had taken over Cotter, Jr.’s President and CEO duties on an “interim” basis and that Reading would conduct a CEO search process “that will consider both internal and external candidates”. Soon thereafter, Cotter, Jr. filed a shareholder derivative suit in Clark County, NV civil court, alleging, amongst other things, that certain board members, including his older sisters, breached their fiduciary duties to all shareholders by improperly terminating him without an appropriate process. The allegations have expanded to criticize how these Reading directors have been running the company since Cotter, Jr.’s termination, cutting Cotter, Jr. and other Reading directors out of the decision-making process.

Likely as a result of this family dispute, billionaire investor, Mark Cuban, a long-time shareholder of both RDI and RDIB voting shares, converted his 13G (passive) SEC filing in Reading’s RDIB shares to a new 13D (active) SEC filing. Mr. Cuban, an owner of several entertainment businesses such as Landmark Theatres, which are synergistic with Reading’s, is the 2nd largest holder of RDIB shares behind James Cotter Sr.’s estate and trusts.

The shareholder derivative action has opened a unique opportunity for Reading’s largest shareholder contingent, holders of RDI non-voting Class A shares, to enter this dispute as “intervenors.” In August, Whitney Tilson (a fellow Seeking Alpha contributor), along with a long-time Reading investor, Jon Glaser, jointly “intervened” and filed a separate shareholder’s derivative suit against all Reading directors alleging additional fiduciary breaches by Reading directors and joining Cotter Jr.’s allegations. As a result of the Nevada court accepting the motion to intervene, no settlement of the shareholders’ derivative action is likely to occur without RDI shareholders’ concerns represented and addressed.

The dispute among the Cotter family heirs, the ‘activation’ of Mark Cuban’s ownership position, and the RDI shareholder intervention suit could be very positive catalysts for the long overdue unlocking of substantial asset values not presently reflected in Reading’s stock price. A more genuine CEO search may also result in hiring an experienced outside professional to run the company.

Investment Opportunity

Reading International’s favorable geographically diversified movie exhibition growth profile and its conservative balance sheet make for a compelling risk/reward investment. The company’s growing cash flow generation continues to lower debt levels and inevitably will translate the company’s enterprise value into a higher equity valuation.

Much of Reading’s real estate has appreciated in value (over the course of more than 15 years of inflation on some parcels) from population growth, up-zoning to expanded/more valuable allowed uses, and in some instances, completed development into rent-generating parcels. Reading can create substantial additional value by developing or redeveloping its raw land or fee-owned cinema and live theater sites into higher recurring cash flows or increased sales proceeds.

Recent cinema chain transactions, including Wanda’s purchase of Hoyt’s, have placed a premium on large cinema chain market shares as noted by the high valuation multiples other larger US publicly-traded theater exhibitors. Reading’s large market shares in Australia (#4), New Zealand (#3) and the United States (#11) should be highly attractive on a break-up or sale of the company. The escalating Cotter family estate dispute increases the possibility of the company’s eventual break-up or sale.

As Reading continues to grow its sustainable cash flows and unlocks (through sale and/or joint venture) the appreciated value in its geographically diversified real estate holdings, investors should close the substantial “value gap” that presently exists in RDI shares.

The Cotter sibling dispute is likely to result in at least one or more of the heirs favoring a break-up or sale of the company. With Mark Cuban potentially on the sidelines with business interests synergistic with Reading’s US operations, and Wanda’s new sizable interests in Australia and New Zealand, interesting alliances may form in the future to accelerate the pace of favorable change for Reading shareholders.

Additional disclosure: Funds I manage are long RDI, RDIB. These funds or its affiliates may buy or sell securities of these issuers at any time.

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Andrew Shapiro is Founder, President and Portfolio Manager of Lawndale Capital Management, an investment advisor that has managed activist hedge funds focused on small- and micro-cap companies for over 18 years. Mr. Shapiro’s proactive ownership approach has been effective in directly creating and unlocking shareholder value in Lawndale’s portfolio companies and has contributed to Lawndale’s activist funds often being ranked among the top event-driven and small-cap value funds in peer databases for long-term performance. In addition to leading Lawndale, Mr. Shapiro has also served as a Director or Observer on portfolio company boards and debt and equity bankruptcy committees. Mr. Shapiro is a member of the National Association of Corporate Directors (NACD) and Lawndale has been a long-time Sustaining Member of the Council of Institutional Investors (CII). Mr. Shapiro has more than two decades of portfolio management and analytically varied experience from a number of "buy-side" positions, employing a rare combination of credit, legal and equity analytic and workout skills. Prior to founding the Lawndale organization in 1992, Mr. Shapiro managed the workout and restructuring of large portfolios of high-yield bonds, distressed equities and risk arbitrage securities for the Belzberg family's entity, First City Capital. Before joining First City, Mr. Shapiro was involved in numerous highly leveraged corporate acquisition and recapitalization transactions for both Manufacturers Hanover Trust and the Spectrum Group, a private equity firm. Mr. Shapiro received his JD degree from the UCLA School of Law where he was an Olin Fellow, an MBA from UCLA's Anderson Graduate School of Management where he was a Venture Capital Fellow and a BS in Business Administration from UC Berkeley's Haas School of Business, where he has taught finance courses and frequently guest lectures. Mr. Shapiro is often quoted on matters of corporate governance, fiduciary duty and activist investing and has been the subject of several articles, including a Business Week article in 2000 calling him “The Gary Cooper of Governance”. He is also a frequent speaker on corporate governance and activist investing issues at a broad range of prestigious forums that include the Council of Institutional Investors, National Association of Corporate Directors, American Society of Corporate Secretaries, SEC Advisory Committee on Small Public Companies, and the Director’s education programs of Stanford Law School, UCLA Anderson Grad. School of Mgmt., the Wisconsin Business School and Yale’s Millstein Center for Corporate Governance, among others. Mr. Shapiro started Lawndale’s funds in 1993 with only $188,000 under management and through performance and added capital has grown the firm’s managed assets substantially. In many of its investments, the firm plays a constructive relational role by actively working with Boards and management teams to help them achieve their strategic and operating goals. In other investments, Lawndale is a direct value-unlocking catalyst, utilizing a range of tools that include aggressively promoting improvements in a company's governance and operational structures, asserting shareowner’s legal rights and taking active roles in restructuring and buyout proposal negotiations.
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