Reading International Continues Growth, Real Estate Remains Undervalued


The editors of have chosen to publish a new article by Andrew Shapiro on Reading International (RDI) and designated it as an “Editor’s Pick.”  This article discusses Reading’s Q3 2011, in particular, continued growth of global cinema exhibition operating results,  progress towards monetizing some of its major real estate parcels having sizable unrealized gains, and other disclosures of note.

Andrew is PM of  Lawndale Capital Management, an investment advisor that has managed activist hedge funds focused on small- and micro-cap companies for over 18 years. His full profile and archive of articles can be found here.


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Q3 September 2011 resultsof movie theater operator/owner and real estate developer Reading International (RDI) (RDIB) (highlighted in this Just One Stock interview and theseother Seeking Alpha articles) again showed continued growth in revenues, operating income and operating margin vs. prior year. Furthermore, Reading’s stock price trades at the biggest discount to book value/share of all three of the larger U.S. publicly-traded theater exhibitors, despite Reading’s safer balance sheet comprised of a low debt/equity ratio and substantial holdings of long-held real estate with sizable unrealized appreciation. Together, these factors make Reading a compelling risk/reward investment. Reading’s detailed 10-Q for Q3 ended September 2011 can be found here and certain salient findings of this filing are discussed below.

Industry-wide box office results for Q3 2011 grew over the prior year. As illustrated in the table below, revenue growth at movie exhibitors with international operations such as Reading and Cinemark Holdings (CNK) continued to exceed exhibitors who rely solely on the U.S. domestic market like Regal Cinemas (RGC) and Carmike Cinemas (CKEC). This quarter’s faster international growth was a function of attendance growth and increases in average ticket prices in addition to foreign currency gains that have fueled past quarters.

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Salient Points From Reading’s Third Quarter Results:

Reading International continued strong y/y growth in both revenues and operating income. Total quarterly revenues grew +10.1% from prior year. Revenues of Reading’s larger cinema segment, which produces the bulk of the company’s cash flows, grew by $6.6MM or 11.9% y/y, while its smaller real estate segment revenues were down only $0.5MM y/y on lower live theater performance rents vs. the prior year. Cinema segment revenue growth was primarily the result of increases in Australian average ticket price and increases in attendance in both the U.S. and Australia partially offset by a decrease in attendance in New Zealand.

Reading’s Cinema segment growth would have been even higher but for continued earthquake damage theater closures in Christchurch, New Zealand, particularly its large Palms multiplex. This multiplex recently reopened in the middle of the current Q4 on November 17, 2011. Reading has earthquake and lost profits insurance on this cinema that will cover some period of time for this cinema to ramp back toward normal business. The company is awaiting initial payment for what is a growing recovery amount and is not yet included in Reading’s financial results.

Q3’s operating income (EBIT) jumped 27.2% from prior year Q3 to $7.1MM. Q3’s operating EBITDA (operating income + dep./amort) of $11.4MM was 20.5% higher than prior year’s operating EBITDA $9.4MM. Reading’s cash flow growth came from its cinema segment, offset slightly with small declines in its real estate segment vs. the prior year. Margins jumped from the prior year, benefiting from operating leverage on fuller theaters, higher ticket prices and increased revenue mix from concessions, which carry much higher margin than admissions.

General and administrative expenses for the period include some amount of non-recurring severance and temporarily duplicated labor costs associated with Reading’s consolidation and transfer of accounting functions in the U.S. and Australia to a single owned Wellington, New Zealand, location. Despite these temporary redundancies, Reading’s Q3 operating margins increased from prior year Q3, benefiting from operating leverage on fuller theaters, higher ticket prices and increased revenue mix from concessions and advertising, which carry much higher margin than admissions.

The box office release schedule for the remainder of the year and into 2012 contains several well-known “franchise” blockbusters and a high number of 3D movies.

Reading’s book value of $5.24/share is up 15.2% from prior year,with Australian and New Zealand 9/30/11 currency exchange rates up y/y only 1.1% and 4.7%, respectively. As explained in this Just One Stock interview, 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. At December 31, 2010, Reading had $58.5MM and $17.5MM of Australian and New Zealand tax NOLs without any expiration date, respectively, and $26.5MM of U.S. NOLs expiring in 2025 and thereafter that will shield the unrealized gains in these properties from substantial taxation.

The table, updated below for Q3 results, illustrates that Reading’s net debt to total assets percentage is among the industry’s most conservative and much safer than Regal Cinemas’ and Carmike Cinemas’ high leverage ratios. In fact, 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 on the company’s real estate.

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Investment Conference and 10-Q Disclosures Highlight Reading’s Real Estate


On November 12, 2011, at a small investment conference in San Diego, Reading’s CFO, Andrzej Matyczynski, made what was the company’s first-ever outside investor presentation. A November 17, 2011, 8-K filing by Reading provided, as exhibits, the investor information handout and slide presentation made at this conference. In his 20-minute presentation, Mr. Matyczynski summarized Reading’s business model and sizable portfolio of cinema and real estate assets. (See the March 2011 Seeking Alpha article, entitled “Reading International: There’s More Popping Than Just Corn” for further discussion on some of these assets.) In addition to this summary, Mr. Matyczynski also disclosed that the company was close to finalizing the sale of Reading’s valuable Cinema 123 theater and land on 3rd Avenue in New York City and also reiterated the appraised valuations Reading had obtained by CBRE on portions of Reading’s large 51-acre Burwood Square development parcel (PDF) in Melbourne Australia, discussed below.

Incremental footnote language appeared in Reading’s Q3 10-Q with respect to Burwood Square as follows: “Discussions with qualified buyers continue, and it remains our plan to monetize at least the residential portions of this property,” and “we continue to consider various methods to monetize all or at least the residential portion of our Burwood development site even though it cannot be classified as a property held for sale pursuant to ASC 360-10-45.”

Reading’s updated plans and methods to monetize the Burwood development were more clearly spelled out in this Seeking Alpha article reporting on Reading’s 2011 annual meeting. The company decided this year that separately monetizing the parcel’s three zoned segments, in a staged manner, rather than all at once, more likely maximizes the parcel’s value (see this Burwood Square property diagram presented at its May 2011 annual meeting showing each of the residential (green), residential/commercial (blue) and retail (yellow) zones).

Furthermore, the Q3 10-Q repeats last quarter’s 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 $55.9 million (AUS$52.1 million.) In fact, in a May 24, 2011 press releaseReading issued as a result of disclosures at its annual meeting, (see also the Burwood Square property diagram) it was disclosed that CBRE valued the 31- to 34-acre residential (green) zone at AUS$1.7MM/acre and the six-plus 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. It should be noted that this valuable Burwood parcel remains completely mortgage free. Thus, all sales proceeds would provide incremental debt reduction and capital to develop the property’s (yellow) entertainment and retail zone.

Other 10-Q Disclosures of Note:

Reading increased its substantial liquidity during the September quarter. At September 30, 2011, Reading had cash and marketable securities of $31.7MM plus a combined $28.2MM of un-drawn availability on its several lines of credit. Reading’s 9/30/11 net debt of $175MM is $10.7MM lower than 6/30/11, as a result of debt paydown from continued strong cash flow generation and sequential declines in currency exchange rates on Reading’s foreign denominated debt.

At the end of August, Reading acquired what is now its largest cinema, a 17-plex in Murrieta, California, near San Diego where Reading already owns four other theaters and enjoys a 12% market share. Reading acquired the theater for what appears to be a very attractive valuation multiple. While the acquisition only partially benefited Q3, as the multiplex is further integrated and improved, it should nicely add to Reading’s U.S. cinema results over the coming year.

For the first time in memory, Reading bought back stock for a second consecutive quarter, purchasing 50,000 shares in Q3 at an average of $4.34/share. So far this year Reading has bought back 72,300 shares for a cost of $328K, or an average of $4.54/share. Note, in 2010, Reading bought back 62,375 shares at an average cost of $4.02/share.

During the quarter, RDI took out letters of credit to begin the construction process for a new eight-screen Angelika Film Center cinema to be built in the Mosiac District development in the Greater Washington, D.C., area.

Subsequent Event – In October, Reading and the IRS agreed that Reading’s already greatly reduced tax settlement (listed as current payable) would be paid through an approximately five-year installment note consisting of monthly payments of $290K. Reading also anticipates that the interest portion of these payments will be deductible from future taxable income.

Trading at a substantial discount to a book value greatly understating the value of its sizable real estate holdings, Reading International’s favorable movie exhibition growth profile and conservative balance sheet make for a compelling risk/reward investment.

Disclosure – Funds I manage are long RDI, RDIB. These funds or its affiliates may buy or sell securities of this issuer at any time.

Disclosure: I am long RDI, RDIB.

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




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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