Seeking Alpha
Activist investor, hedge fund manager, small-cap, deep value
Profile| Send Message| ()  

The recent Q4 December 2011 earnings release of movie theater operator and real estate developer, Reading International (RDI), illustrated the company's continued operating growth vs. prior year. Despite non-recurring 'below-the-operating-line' items (e.g. interest rate hedges, insurance recoveries, deferred tax asset recognition, etc.) impacting Q4 and full year 2011 net results, Reading's Revenues, Operating Income and Operating Margin all were up y/y.

Historical background on Reading, now a $246MM revenue, but only a $100MM market cap company, is available in this past Just One Stock interview and these other Seeking Alpha articles. Notwithstanding the company's consistent delivery of operating performance, Reading lacks coverage by even a single sell-side industry analyst. This lack of secondary analysis contributes to the stock price of RDI trading at the biggest discount to book value/share of all three of the larger US publicly-traded theater exhibitors, Regal Cinemas (RGC), Cinemark Holdings (CNK) and Carmike Cinemas (CKEC), despite Reading's stronger growth, safer balance sheet, superior holdings of long-held real estate with sizable unrealized appreciation, all geographically diversified across several countries in different hemispheres.

This article attempts to overcome some of the analytical vacuum surrounding this still undercovered company and to illustrate that Reading remains a compelling risk/reward investment by providing:

  1. Discussion of Q4 and FYE December 2011's financial performance, highlighting cinema outperformance over peers;
  2. Highlights of key disclosures in Reading's 2011 10-K filing filed recently with the SEC; and
  3. Many links to Reading's thorough disclosures, which offer investors substantial information about Reading's business plan and its massive pool of valuable real estate assets;

2012 Box Office Has Started Strong With Great Prospects

According to Box Office Mojo, without Q1 even completed, 2012 box office grosses have already started off extraordinarily hot, up around 20% y/y, featuring Universal Picture's (CMCSA) "Dr. Seuss' The Lorax" and Lions Gate's (LGF) blockbuster, "The Hunger Games." Reading Cinemas helped Australia become the biggest foreign market for The Hunger Games opening. The movie release schedule for the remainder of 2012 contains several well-known 'franchise' blockbusters and a greater number of 3D movies than 2011. In a new twist that should add to exhibitor's profitability, several past blockbuster films are being re-released in 3D, during historically slow seasonal box office periods.

Q4 2011 Financial Results Illustrate Consistent Global Cinema Performance

Reading's total quarterly revenues grew +6.1% from prior year. Revenues of Reading's larger Cinema segment, which produces the bulk of the company's cash flows, grew by 5.6% y/y, while its smaller Real Estate segment revenues grew by more than 10%. Cinema segment revenue growth was primarily the result of increases in US and Australian attendance, and modest Aussie currency improvement, offset by a drop in New Zealand attendance from Christchurch earthquake-damage theater closures. Real Estate segment revenue growth was the result of improved live theater rental income, Aussie currency improvement and a prior-year non-recurring negative accounting adjustment.

Despite Q4 2011 domestic industry-wide box office results turning down 4.8%, Reading's Cinema Segment y/y revenue, both domestically and globally, continued to grow over the prior year. As illustrated in the table, below, this revenue growth exceeded all three of the larger US publicly-traded theater exhibitors, fellow international exhibitor, Cinemark Holdings, and US-only players, Regal Cinemas and Carmike Cinemas.

Q4 - December, 2011

RDI

CNK

RGC

CKEC

Y/Y Rev. Growth

US Cinema Revenue

8.5%

-1.9%

-7.1%

4.3%

Global Cinema Revenue (inc. US)

5.6%

2.1%

-7.1%

4.3%

Cinema Revenue Mix

Domestic %

51.0%

70.3%

100.0%

100.0%

International %

49.0%

29.7%

0.0%

0.0%

In a tough box office environment where Domestic industry-wide box office results for 2011 dropped 3.7% vs. 2010, Reading also bettered competitors. As illustrated in the table, below, revenue growth at movie exhibitors with international operations such as Reading and Cinemark Holdings continued to exceed exhibitors who rely solely on the US domestic market like Regal Cinemas and Carmike Cinemas .

2011 Full Year

Y/Y Rev. Growth

RDI

CNK

RGC

CKEC

US Cinema Revenue

1.0%

0.6%

1.8%

-1.2%

International Cinema Revenue

13.1%

23.4%

0.0%

0.0%

Global Cinema Revenue (inc. US)

7.0%

6.5%

1.8%

-1.2%

It is noteworthy that Reading New Zealand's Q4 and 2011 y/y results were weakened by the closures of Reading's Palms multiplex in Christchurch from 2/2011 to 11/2011 and then again in late December 2011 into early January 2012, due to the major February 2011 earthquake and a large December aftershock. Reading's multiplex at The Palms has again recently reopened. During Q4, Reading received its first of several expected insurance payments for reconstruction costs and lost profits damages. However, while New Zealand cinema operational weakness was accounted for in the segment's regular 2011 operating results, the insurance proceeds in Q4 was booked as 'below-the-line' Other Income.

Q4's Operating Income (EBIT) jumped 130% from prior year to $2.1MM, despite a non-recurring impairment charge on Reading's Taringa (Brisbane, Australia) parcel, whose sale was completed after quarter's end. Adjusted Operating EBITDA (Operating Income + Dptn/Amort + impairment) of $6.7MM was 30% higher than prior year's Operating EBITDA. Reading's cash flow growth vs. prior year came from both its Cinema and Real estate segments as well as a reduction in General and Administrative expenses (mostly due to reduced litigation costs.) Cinema Segment margins jumped from prior year, benefiting from operating leverage on fuller theaters, higher ticket prices and increased cinema revenue mix from concessions, which carry much higher margin than admissions.

Q4's Interest expense created the quarter's loss and decline vs. prior year results. Negative interest rate swap mark-to-market and a modest interest rate margin increase from Reading's new Australian credit line raised reported interest expense. Prior year's interest expense was reduced by a substantial accrued interest expense forgiveness from adjustments to the purchase price of Reading's 2008 Consolidated Cinemas acquisition.

Strong Balance Sheet Loaded With Hard Assets

Reading increased Book Value of $5.43/share is up 11.5% from prior year, with Australian and New Zealand 12/30/11 currency exchange rates up y/y only 1.3% and 1.5%, respectively. As explained in the 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.

The table, updated below for Q4 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, 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.

Q4 - December, 2011

RDI

CNK

RGC

CKEC

Balance Sheet Comparison

Price*

$4.43

$22.05

$13.57

$14.02

P/B Ratio

0.8

2.5

-

-

Net Debt ($mm)

$172.8

$1,192.0

$1,763.3

$301.5

Total Assets ($mm)

$430.8

$3,522.4

$2,341.3

$422.9

Net Debt/Total Assets %

40%

34%

75%

71%

* Closing prices as of 03/29/11, all balance sheet items from 12/31/11 10-K.

Other 10-K disclosures of note:

Reading finished the December quarter with substantial liquidity. At December 31, 2011, Reading had cash and marketable securities of $36.9MM plus a combined $25.2MM of un-drawn availability on its several lines of credit. Reading's 12/31/11 debt, net of the above-mentioned cash is $172.7MM, lower than prior quarter and prior year as a result of continued strong cash flow generation.

At December 31, 2011, Reading had $95.1MM in tax NOL's ($45.9MM and $15.8 MM of Australian and New Zealand tax NOL's, 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.

For the first time ever, Reading bought back stock for a 3rd consecutive quarter, purchasing 100,000 shares in Q4 at an average of $4.19/share. During 2011 Reading bought back 172,300 shares for a cost of $747K, or an average of $4.34/share. Note, in 2010, Reading also bought back 62,375 shares at an average cost of $4.02/share.

Reading's Business Plan: Adding Value To Hard Assets

The business plan set forth on page 44 of Reading's 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. [Marcus Corp.'s (MCS) 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, 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

At the November 2011 San Diego Investment Conference Reading's CFO, provided an update that the company was close to finalizing the sale of Reading's valuable "City Cinemas 1, 2 & 3" 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.

New York Real Estate - Reading's 10-K disclosure provided some update on its plans for both its Cinemas 1, 2 & 3 and Union Square Theater properties in Manhattan, New York City. "Given the resurgence of Manhattan commercial real estate values, in 2012, we intend to focus on the sale of our Cinemas 1, 2 & 3 property and the redevelopment of our Union Square property." The 10-K further states: "In some markets (such as Manhattan), our real estate portfolio values have increased and have, in our estimation, a value 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 - Previously, this Seeking Alpha article reporting on Reading's May 2011 Annual Meeting discussed Reading's plans and methods to monetize and develop its Burwood Square parcel. At the Annual Meeting and via its 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 [yellow] and Reading's plan to monetize or develop these zones separately, rather than all at once, to maximize the parcel's overall value.

The 2011 10-K did not disclose any further progress in monetizing portions of Burwood Square, but continued with prior quarter's disclosure of the company's sales intent: "discussions with qualified buyers continue, and it remains our plan to monetize at least the residential portions of this property." Furthermore, the 10-K repeats 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 entire parcel] 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 - Reading is actively pursuing the development of phase II of its Courtenay Central ETRC property in Wellington, New Zealand. In addition, 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.

2011 10-K Note 28 - Subsequent Events

Refinancing - In February 2012, Reading successfully renewed its New Zealand credit facility, previously maturing in March 2012 and listed as a Current Liability, for another 3-years, now maturing March 31, 2015. Accordingly, this New Zealand credit line was moved to long-term liability on Reading's 12/31/11 balance sheet.

Acquisition - In January 2012, 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.

Acquisition - 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 does not presently own. The note was acquired from the original lender with the intention of satisfying the debt in a manner that increases Reading's ownership in this theater at an attractive valuation.

Sale - In February 2012, 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. Reading took a final impairment charge of $369K on these parcels in this Q4 pursuant to a sale price of $1.8MM.

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.

Source: Reading International: 2011 10-K, Operating Growth Continues, 2012 Box Office Starting Hot

Additional disclosure: Funds I manage are long RDI, RDIB, CNK June 20 puts, and short CNK, CNK June 17.5 puts, CKEC and CKEC June 10 calls, LGF and LGF April 16 calls. These funds or its affiliates may buy or sell securities of these issuers at any time.