Continued Growth Verified in Reading International's Q3 Results

| About: Reading International, (RDI)
Reading International’s (NASDAQ: RDI) September Q3 2010 earnings press release was followed by its 10-Q filing, which I have recently finished analyzing. The quarterly results displayed continued growth for this theater exhibitor and real estate developer in Australia, New Zealand and the United States.
Here is a summary of salient points:
  • Reading maintained strong growth in both revenues and operating EBITDA. Total quarterly revenues grew +8.2% from prior year and 6.3% from prior quarter. Both of Reading’s segments, Cinema and Real Estate, contributed to this growth. Versus prior year, Reading’s larger Cinema segment revenues grew 5.7%, while its smaller Real Estate segment revenues grew 43.1%.
  • Prior year 2009 operating cash flow benefited by a one-time sizable $2.6MM recovery (booked as a reduction in SG&A expense) of more than a year’s worth of litigation expenses related to Reading’s past investment in Malulani. Removing this one-time recovery to achieve normalized prior year Q3 2009 SG&A expense and operating results and Q3 2010 operating EBITDA (Operating Income + Dptn & Amort) of $9.44MM was 15.4% higher than 2009’s recurring operating EBITDA of $8.18MM. Basically greater overall operating leverage on lower SG&A expense outweighed gross margin compression in the cinema segment.
  • All of Reading’s Y/Y cash flow growth in Q3 came from the Real Estate segment, primarily from a new Brisbane, Australia project that has leased up, as well as increased US live theater rentals. Cinema segment revenue growth (from increased 3D box office and foreign currency movements) was offset by compressed gross margins, keeping Y/Y Cinema segment operating EBITDA flat at around $8.7MM.
  • The box office release schedule for the remainder of this year and into 2011 contains several well-known ‘franchise’ blockbusters and a sizable increase in the number of 3D movies.
  • Reading’s book value/share rose +20% from last quarter’s balance sheet, to around $4.55/share. As discussed in my September 30, 2010 "Just One Stock" interview in greater detail, I believe Reading’s book value still greatly understates the current fair market value of the company’s Australian, New Zealand, New York and Chicago real estate, much of which has appreciated in value from up-zoning or development into rent-generating parcels.
  • Reading maintains substantial liquidity and an interest in accretive acquisitions of cash-generating assets. September 30, 2010 cash and marketable securities were $29.5MM and Reading has a combined $21.9MM of undrawn availability on its lines of credit. The company has several unencumbered parcels and, in addition, has an effective shelf registration for up to $100MM of debt and warrants for debt, “units”, and other securities to enable Reading to act quickly to structure and finance growth transactions.
Other items of note:
  • Subsequent to quarter end, Reading executed the last of three contingent purchase price reduction clauses in its original purchase agreement for Consolidated Entertainment (181 screens in Hawaii and California), as discussed in greater detail in my October 10, 2010 Seeking Alpha article.
This contingency reduces Reading’s seller note liability on this 2008 purchase by another approximately $15.1mm, comprised of $12.5MM of principal and now another $2.6MM of accrued interest. This debt forgiveness will not only result in a reduction in Reading’s seller debt and accrued interest balance to around $0.7MM, but also a reduction in goodwill on the balance sheet by $12.5MM, and a sizable reversal in the $2.6MM previously recognized interest expense, benefiting net income during this current Q4.
  • Reading has also entered into a term sheet with GE Capital to increase the size of its senior term loan on this Consolidated Entertainment subsidiary by $8MM, while gaining release of certain covenants and an extension on this loan’s maturity.
  • Reading’s process to sell its “crown jewel” of undeveloped real estate, its 51-acre Burwood Square parcel in Melbourne Australia, is continuing. (For more details on this parcel and the plan to monetize it, see my May 27, 2010 and May 16, 2010 articles.) The fact that the parcel’s carrying value (required to be at the lower of cost or market) increased this quarter’s 10-Q to $50.2MM from last quarter’s $44.1MM (equal to the decline in the US dollar vs. the Aussie) means the recently appraised value on the parcel (presumably taking into account preliminary bids) was at least this high. This parcel remains completely mortgage free.

Disclosure: At time of writing, funds the author manages hold a long position in RDI and RDIB. The funds or its affiliates may buy or sell securities of this issuer at any time.