Business

Andrew Shapiro: Important Takeaways From Reading International’s 2015 Annual Meeting

Important Takeaways From Reading International’s 2015 Annual Meeting by Andrew Shapiro,

Summary

This year’s Annual Meeting attendance and voting and management’s slide presentation and Q&A all provided incremental intelligence to an evolving value-unlocking situation.

Reading’s Cinemas 1, 2 & 3 property development could be worth far more if negotiations with a contiguous parcel owner succeed.

The fight amongst Cotter family siblings over their father’s estate and voting control of Reading is an incremental catalyst to unlock value.

Reading International’s conservative balance sheet (less than 12% adjusted debt/equity) provides flexibility to develop underutilized real estate, build, acquire or enhance cinemas or return capital to shareholders.

Andrew Shapiro: Important Takeaways From Reading International's 2015 Annual MeetingThis article discusses observations from the attendance and voting at the Annual Meeting of movie theater operator/owner and real estate developer, Reading International. It also discusses disclosures from management’s slide presentation and Q&A that were incremental to Reading’s recent Q3 earnings release. (For my analysis and discussion of that earnings release, See my November 9, 2015 Seeking Alpha article, entitled “Reading International’s Recent Noteworthy Cinema And Real Estate Milestones.) With respect to Reading’s Cinemas 1, 2 & 3 property development, the Annual Meeting provided more details about negotiations with a contiguous restaurant property owner for a joint venture development that could be worth far more for all parties, than if Reading developed its parcel alone.

This is the company’s first Annual Meeting since the death of Chairman/CEO and controlling shareholder, James Cotter, Sr. and provided valuable intelligence to a Reading International in an evolving post-Jim Cotter, Sr. era.

Most public company annual meetings are perfunctory-scripted events of little value to shareholders. However, Reading’s annual meeting has perennially been worthwhile for shareholders to attend and pose their questions, especially since the company doesn’t yet hold quarterly conference calls. (Note, Chairwoman/interim CEO Ellen Cotter disclosed that Reading would like to begin this standard practice in 2016.)

Cotter Family Estate Fight Delayed The Timing Of The Annual Meeting

Soon after Cotter Sr.’s death, his sizable estate became the subject of litigation between his daughters, Ellen and Margaret Cotter and their younger brother, James Cotter, Jr., who was designated by Cotter Sr. and Reading International’s board to become successor CEO of the company.

One suit, involving the Jim Cotter, Sr. Living Trust and a sub-trust for the benefit of his grandchildren, is important to Reading shareholders because, this trust will eventually hold approximately 70% of Reading International’s Class B voting shares and thus control of the company and its board. While all 3 siblings are presently Co-Trustees of the Living Trust, some of Reading’s voting stock has not yet been transferred from the Estate of James Cotter, Sr., where the sisters are sole executors without their younger brother and is the subject of another lawsuit in Nevada.

While Reading’s Annual Meeting has almost always been held in May, this year’s meeting was delayed by uncertainty over which siblings had the power to vote Reading shares held by the various estate and trust entities.

In early June, the Cotter sisters, along with some of Reading International’s board, fired Jim Cotter, Jr. as CEO without cause and made Ellen Cotter Interim CEO, while a “search” for a new CEO has been initiated. This firing escalated the litigation in the estate cases and caused the filing of new shareholder’s derivative suits in Nevada, Reading’s state of incorporation.

A second shareholder’s derivative suit, subsequently filed by independent Reading shareholders “Intervenors”, aims to further reform Reading’s board and governance practices as well. (For additional discussion about the many suits, see my August 31, 2015 Seeking Alpha article entitled, “Reading International’s Q2 2015: Set Records, Full Of News“.)

Cotter Estate Fight Raises The Ire Of Reading Shareholder Mark Cuban

As a result of the Cotter family dispute, uncertainty over the family’s voting shares, and the information disclosed in the various lawsuits, billionaire investor, Mark Cuban, a long-time shareholder of both RDI and over 13% of RDIB voting shares, converted his 13G (passive) SEC filing in Reading’s RDIB shares to a new 13D (active) SEC filing at the beginning of August. Mr. Cuban, an owner of several entertainment businesses that are synergistic with Reading International’s, such as Landmark Theatres, is the 2nd largest holder of RDIB shares behind Cotter Sr.’s estate and trusts.

Both a recent Seeking Alpha article by Chris DeMuth, Jr. and a Deal Pipeline article, highlighting how the Reading 2015 Annual meeting might provide insight into the control fight and the company’s future, added to the pre-meeting drama.

Noticeable Meeting Attendance, Voting Activity and Mark Cuban Request

I have attended Reading International’s (and its predecessor companies’) annual meetings for many years, long before the Cotter siblings started working at their father’s company. Never before have there been so many attorneys present. One attorney’s presence did stand out to me – Robert Hart, General Counsel and Executive Vice President for The Mark Cuban Companies.

Typically, at uncontested annual meetings, votes are pre-cast by proxy card and the business portion is scripted and completed very quickly. However, this isn’t the case when there is or might be a contested election or matters are brought up from the floor. It was notable that the shares of Mark Cuban, Pico Holdings and Lawndale Capital Management (my firm) were represented and voted in person.

I can’t speculate as to why Mark Cuban and Pico chose to vote in-person. However, I can share my reasons for doing so. At the meeting’s record date, most of the Cotter family holdings of approximately 71.9% of Reading International’s Class B voting shares and the legal right to vote those shares were the subject of the litigation. In the event any or all of those shares were not allowed to vote because of the lawsuits, the 28.1% of voting shares held by the public, most of which is concentrated in the hands of Mark Cuban, Lawndale’s funds, Pico Holdings, Teton Advisors (Gabelli) and Dimensional Fund, could have actually been a plurality of shares allowed to vote. I wanted my votes personally in hand in order to support any alternate slate of nominees more independent than those nominated by Reading. Additionally, with my votes in hand, I could support any proposal made by others that made sense, and oppose proposals I didn’t like.

While no alternate slate of nominees or proposals from the floor were presented at the meeting, I cast Lawndale’s votes to “withhold” on the two newly appointed “independent” directors, Michael Wrotniak and Judy Codding, as well as legacy directors, Ed Kane and Guy Adams. I feel the sourcing and relationships of all four of these individuals to the Cotter family are unacceptably conflicted.

Of further note, after Reading International’s slide presentation there was a robust question and answer session. During that session, Robert Hart, Mark Cuban’s attorney, asked Reading to hire an outside consultant, selected by independent shareholders, to evaluate the company’s corporate governance and its Board’s composition and effectiveness. He further asked that the consultant make recommendations based on its findings. Craig Tompkins, Special Counsel to the Interim CEO, who was in charge with the operation of the Annual Meeting, said Reading would not agree to Mr. Hart’s request at this time. I think this request was a good one and such an evaluation and its recommendations are much needed.

Sarah Pringle of The Deal authored a good summary of the estate fight and Annual Meeting drama entitled, “Reading Rejects Cuban Request For Independent Adviser“, including a direct response from Mr. Cuban.

Management’s Presentation And Cinemas 1, 2 & 3 Potential Expanded JV

Following the formal business agenda of the Annual Meeting, Reading’s management gave an extensive presentation (a link to the slides can be found here) on several growth and development initiatives currently underway in both its real estate and movie theater segments.

The presentation included new information regarding Reading International’s Cinemas 1, 2 & 3 property in New York (3rd Avenue between 59th and 60th). Reading has for some time said that it was evaluating the potential to redevelop this property. However at the Annual Meeting, Reading management discussed that it is now working with the owners of the adjacent restaurant property (on the corner of 3rd Avenue and 60th Street, just north of Cinemas 1, 2 & 3) on a feasibility study (being prepared by Edifice Real Estate Partners, LLC) for the possible joint development of the properties into a larger, much higher-valued hotel, retail, and/or residential development. According to Reading’s Q3 earnings release, the combined property could be as large as 94,000 square feet not counting up to approximately 15K sq. ft. of bonus space from transferable development rights.

A new slide (slide #36, illustrated below), showing a rendering of this larger development project that included the adjoining parcel, was introduced as part of Annual Meeting’s slide presentation. According to the Edifice Real Estate Partner’s representative at the meeting, the feasibility study was to be completed “in the next two weeks.” No date was given as to when a decision would be made or deadline would occur for agreement to develop the properties jointly or for Reading International to go back to its existing plans to develop its property alone.

In an August 2013 Seeking Alpha article on Reading, I discussed a valuation of at least $100MM for just two of Reading International’s 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 additional buildable square feet has been planned for each these two properties. Reading’s recent 10-Q has said comparable sales of New York City development property have recently transacted at $1,100 per buildable square foot. Using this $1,100 per buildable square foot metric, results in an approximate value of $173MM or over $7 per RDI share for just the Cinema 1, 2 & 3 and Union Square projects. While 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.

Investment Opportunity

RDI’s present share price does not fully reflect the underlying value of the company’s geographically diverse cinema or real estate assets (especially the embedded appreciated value in both Union Square and Cinemas 1, 2 & 3 redevelopment properties). (See my prior Seeking Alpha articles on Reading.)

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.

Over the past year, other authors of articles on Reading International have assigned values for RDI at $23-$26/share. (Sources: October 1, 2015 Barron’s article, entitled Reading International Stock Can Rise 100% and Value Investors Club, November 12, 2014.)

Reading can create substantial additional value by developing or redeveloping its current raw land or fee-owned cinema and live theater sites into higher recurring cash flows or increased sales proceeds. As Reading converts these non- or low-cash flow development properties into cash flow or sale proceeds, it becomes easier for investors to value this real estate, and should contribute to closing the substantial “value gap” in the company’s share price from underlying asset values.

The dispute among the Cotter family heirs, the ‘activation’ of Mark Cuban’s ownership position, and the RDI shareholder derivative suits should be very positive catalysts for the unlocking of substantial asset values not presently reflected in Reading’s stock price.

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. Additionally, Reading’s de-leveraged balance sheet expands the array of value-enhancing alternatives available.

Recent cinema chain transactions by Regal Entertainment Group, Cinemark Holdings, AMC Entertainment Holdings and especially AMC’s parent, Wanda Cinema’s, purchase of Hoyts Group, (See my recent Seeking Alpha article, titled In A Year Of Major Events For Reading International, Wanda’s Purchase Of Hoyts Turns Our Head) 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 Cotter sibling dispute is likely to result in at least one or more of the heirs losing influence and control at the company and likely favoring a break-up or sale of control of the assets. With Mark Cuban potentially more engaged and Wanda’s new sizable investment in Australia and New Zealand, and with large exhibitors Regal, AMC, Cinemark and Wanda seeking to acquire additional chains of Reading’s size, interesting alliances may form in the future to accelerate the pace of favorable value-unlocking for Reading International shareholders.

Disclosure: Funds I manage are long RDI, RDIB and short AMC and CNK. These funds or its affiliates may buy or sell securities of these issuers at any time.

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