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Reading International Is Cheap, But Will Probably Get Cheaper

Mar. 10, 2020 5:52 AM ETReading International, Inc. (RDI)353 Comments
Cardon Capital profile picture
Cardon Capital


  • Reading International is a unique business with unique assets and a unique management team.
  • It operates cinemas in the US, Australia, and New Zealand - all of which fund the company's real estate business.
  • We like the business on a micro level, but our macro concerns cause us to take a "wait and see" approach with this one.

Reading International (NASDAQ:RDI) is a globally diversified cinema and real estate company. The company is unique in many ways. Aside from having one of the most detailed (and enjoyable!) annual reports we’ve ever read, RDI is family-controlled (21,240,044 shares of class A non-voting common stock and 1,680,590 shares of class B voting common stock) and uses the profits from the cinema business to fund its real estate development segment. Even putting aside the company’s corporate governance issues, the two wildly unrelated operating segments would certainly be reason enough for the market to have trouble pricing the equity. This is largely because the real estate segment produces virtually zero operating profits and should be valued more on an NAV basis, whereas the cinema business produces ample cash flow and should be valued on a present value basis.

One look at the chart below and you can see the discrepancy between the two segments in terms of revenue generation (in that the real estate segment produces essentially zilch). What you’ll also see is that the business is diversified across three countries.

(Source: Company 2019 Annual Presentation)

As mentioned, the company produces one of the best 10-Ks we’ve read in some time. We’d encourage all of you to take the time and read it. At a high level, RDI’s basic strategy is to fund its real estate purchases and development via the cash flows from the cinema business. RDI then keeps the assets on its books (usually at a much lower price than market value) and rents out the real estate to tenants; or the company plans on developing the real estate and monetizing the property at some point in the future. RDI strikes us as the archetypal deep value investment that would be sold at a much higher price than the going rate of the stock, but no one really knows if

This article was written by

Cardon Capital profile picture
Equity analyst; self-proclaimed value investor with an emphasis on small/micro cap stocks and special situations. Email me for any reason (questions, comments, concerns, or just to talk stocks - all are welcome) at Cardoncapital@gmail.com.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (353)

Nat Stewart profile picture
And to think these greedy Jerks had an $18.50 offer 2 yrs ago.
Gregg Sterling profile picture
And that was a starting offer. I'm sure they could have negotiated more. Amazing how many family businesses manage to destroy tons of value due to pure greed, nepotism, and pure incompetence.
Random Macro Analyst profile picture
@Nat Stewart @Gregg Sterling

Situation like this is why I tried to call out early on how management put us all in jeopardy.

how, you ask?

$300mm+ of long term leases...

They somehow managed to keep adding these freaking leases!

Dealing with the debt is one thing, but these leases are a freaking nightmare...We need someone to buy our entire leased cinema business, heck we would be lucky to get $0 if they would just assume our lease liabiliities.

The activity in the voting shares caused me to have some false, or at least early, hope
Andrew Shapiro profile picture
@Gregg Sterling @Nat Stewart Yes - Patton Vision said they would have offered more if provided the due diligence access to support such a higher bid.
Gregg Sterling profile picture
Well apparently RDI getting out of the Russell index caused some spring loaded action. Maybe for now it's better off to have them out.
Andrew Shapiro profile picture
@Gregg Sterling stock was shorted and part of russell deletion derivative trades. We suffered greatly in May from that those being put on and this is simply reversion back to April levels, especially after 10-Q shows ample liquidity at end of March with far better visibility - even with studio pushbacks - on re-openings than in April/May as well.
Gregg Sterling profile picture
@Andrew Shapiro Thanks. Yes I thought the release was pretty good especially on the Australia/NZ side. Let's see how long it takes them to lease up the Union Sq buuilding.

Any thoughts on the long term prospects for office lease space in NYC? I've read some dire predictions. I don't quite agree with them, but would not be surprised to see some decline in lease rates.
Charlie's Munger profile picture
How about those 1q buybacks? Certainly indicative of thinking re value...
Jamm Systems profile picture
AMC has more than tripled off its lows.

RDI- not so much.

It's all about management.
Andrew Shapiro profile picture
@Jamm Systems Management has far less to do with the present price action than Enterprise value size and analyst coverage. You are correct in your price movement observations - That's the point.

They show the same movie product and have been closed, RDI has far less leverage and liquidity risk than $AMC. $RDI locations far better than $AMC from COVID standpoint. Reading is 3rd largest chain in New Zealand, 4th largest in Australia and the bulk of its US screens are in Hawaii. These are all low COVID islands. In fact, New Zealand has eliminated COVID and reopened without restrictions inside the country (you can't visit without quarantine).

$AMC common stock is an option way out of the money and RDI current price values company at less than its underlying OWNED real estate and investor gets the cinema segment for FREE.

Short $AMC Long $RDI
Jamm Systems profile picture
@Andrew Shapiro Andrew, further to your point that RDI is just overlooked-

I've been focused on asset values and management change, but if you look at the operating results, there's a heck of a turnaround story lining up for 2021.

Next year should be a banner year for the cinema due to release of movies pushed back from 2020, plus a full slate of big-potential movies already set for next year (like Avatar 2). Results should rival 2018, when EPS was 60 cents per share.

Still, the issue is the $450 million in debt. More than 80% of RDI's enterprise value is debt. Now, in the case of RDI (as opposed to, say, AMC) that debt is more than offset by asset values. The market value of RDI won't truly take off until some of that debt is retired, which it seems won't happen until management has a change of mind.

I'd expect this stock to trade up to $6-8 next year just from normalization of the theater biz, and then at some point in the not-distant future we'll get the big move due to asset monetization.
Andrew Shapiro profile picture
@Jamm Systems I agree on the operating turnaround - assuming the sisters don't screw it up - and point out that with the predominance of their screens in New Zealand, Australia and Hawaii, where COVID has been quite low and controlled, may lead to faster and bigger rebound than peers in other locations. Good news is that down under has its own full operating mgmt team doing a great job.

As for your calculations - $RDI only has around $185MM of Net term debt as of 12/31. A chunk is vary long term subordinated debt in the form of 'trust preferred' and another chunk are underleveraged mortgages tied to specific property. The remainder you see are operating leases on the cinemas they don't own (note they outright own many theaters in NZ and Aus.)
Alta500 profile picture
Listen to the AMC earnings call from today (6/9/20). Some key takeaways, seat restrictions may ultimately not be a big deal to movie theaters. AA pointed out that AMC sold just 17% of their total available seats last year. Clearly opening weekends are a different story. He also pointed out that they have a lot of flexibility with respect to scheduling. AA is not worried about supply of seats, given scheduling flexibility; the question is demand for seats. TBD.
Andrew Shapiro profile picture
@Alta500 I was on the call and in the question queue but they terminated call before letting me ask my question(s). Indeed cinemas can and will do ok if they can create the environment comfortable for customer demand. I note that New Zealand, where $RDI is one of that country's largest theater chains, has ELIMINATED COVID cases and their reopening is without restriction for their citizens. NO attendance/occupancy restrictions on theaters! They are banning/quarantining any newcomers to the island nation for now but in the process of negotiating a 'bubble agreement' with Australia. I think they are waiting for Australia to eliminate COVID first. www.nytimes.com/...
bazooooka profile picture
@Andrew Shapiro Amazing work you have done/shared here. Where do you ballpark RDI's nav today (5X higher)? And what is max pps you'd pay if you had to live with the sisters as stewards going forward versus a pps if the brother gets control (or Cuban)? I assume it's something like $5 for the sisters and much higher for the others?
Andrew Shapiro profile picture
@bazooooka I believe NAV is MORE than 5X higher than present prices but how high depends on valuation multiple cinema segment compresses down to. Need more visibility on timing for COVID vaccine and herd immunity for that. Alternatively, more visibility as to how phased openings and occupancy limits work out. The backlogged movie slate is amazing. Will there be a shift in movie going to the weeknights to avoid 'crowds' that overcomes occupancy constraints on weekends? Regardless, today the value gap is so large, with an EV below Real estate value, pinpointing that new cinema segment multiple not the issue right now.

Jim Jr. stopped seeking control to run the company a long time ago. He wants outright sale and monetization before his sisters with their very poor stewardship destroy more value for his kids and himself. There is no doubt a large Cotter family control discount is warranted. But unlike other family controlled entities this one has a real catalyst for inevitable removal. But the wheels of justice move slowly even when the courts aren't closed due to pandemic and the sisters costly attorneys have mad skills at the art of delay. But appeals keep going to the same judges who are tiring of their games while the young grandkid's inheritance get squandered. An unconditional bid to the trust and the court would certainly expedite the proceedings.

Cuban or other party control does not necessarily mean any discount whatsover at least initially during a honeymoon period because so much Cotter waste and costs can be gutted from the company's bloated overhead and the assets can be optimized with non-core assets actually sold and 'evaluations' of potential developments completed and either commenced or sold.
Random Macro Analyst profile picture
@Andrew Shapiro You're the man for keeping us all informed. I hope the court can get us across the finish line and we can sell the movie theaters!
Andrew Shapiro profile picture
@ankram @Michael Loftis Sell the very valuable real estate in this interest rate environment not just the movie theaters. In fact probably run a thoughtful auction on cinema segment geographies which would also provide the time to recover to normalized cinema segment cash flows.
Andrew Shapiro profile picture
@Montrealer @Gregg Sterling

Reading Int'l Presenting at Gabelli Conference Virtually Today - June 4th

Reading Announces Several Operational and Financial Updates Related to COVID-19 Pandemic
Gregg Sterling profile picture
If love to know if they take any real questions during that conference unlike their conference calls.
Andrew Shapiro profile picture
@Gregg Sterling questions were able to be sent to the gabelli research analyst john tinker who was interviewing each company representative(s) via zoom conference. all in all RDI mgmt dodged the questions and did a fairly poor job when presented with softball questions that would have allowed mgmt to educate a brand new large audience. IMO a greatly missed opportunity.
Charlie's Munger profile picture
Wow so basically no updates from company in last 2 months - borderline criminal
Gregg Sterling profile picture
They'll do the bare minimum required. The good news though is businesses in Australia and New Zealand are reopening which is good for RDI's real estate segment. They've really crushed the curve in those countries. Cinemas may reopen around July.

The real question is when will they be able to lease out the Union Square building and what kind of rates will they get.
Random Macro Analyst profile picture
At this point they may need to do a distressed sale of Union Sq for the cash...

This is pathetic...
Gregg Sterling profile picture
No reason for that.
Gregg Sterling profile picture
Amazingly.. or maybe not so amazingly RDI closing in on 3 again. If the sisters stepped down today the stock price would probably double.
Random Macro Analyst profile picture
No telling how low it can go if it breaks through $3

the constant selling pressure has battered this thing to a pulp
Gregg Sterling profile picture
Basically just no buying going on and volume is extremely low so this automated selling whether it be through index funds or whatever just keep pushing it down automatically.
Random Macro Analyst profile picture
Well every single day the races get started (not sure if it's actually at 930 or not) with the sisters selling 2500 shares.

That don't help, brotha.
Jamm Systems profile picture
Was just over at the SEC site looking at the many recent 2,500 share sales by the Cotter trust and sisters.

It certainly appears that the sisters are living, as well as funding their litigation, through share sales. Such vanity and foolishness. These are difficult times, and they're not acting to benefit the company or themselves.

@Andrew Shapiro Any news on the litigation?

Looks like some M&A now for AMC. Doubt this will have much long term impact on RDI shares.
Andrew Shapiro profile picture
@Jamm Systems You are very much confusing the daily sales of 2500 $RDI shares from the Cotter Living Trust to pay the sizable annual installments of estate taxes they owe pursuant to their section 6166 plan with the IRS with the sizable but few block sales by the Cotter sisters to fund their living and litigation expenses. Note when the trust sells these shares daily (with a usual filing of form 4s late in the nite Wednesdays and Fridays) that Margaret and Ellen as co-trustees are required to file an individual form 4 for themselves along with the form 4 for filed by the Trust. Those filings are where they will slip in a personal sale from time to time - a few times during periods when IMO they are in possession of material insider info.

Latest status on litigation is that the California Appeals Court "summarily denied" the sisters' Writ appeal of the Probate court's decision to deny the sister's motion to dismiss the court appointed independent Guardian Ad Litem ("GAL") who represents the 5 young Cotter grandchildren and who seeks a court order to sell the entire 67% voting control block of shares that has been left to the grandchildren by the late Cotter, Sr. The GAL has filed a motion to dismiss this appeal which could be ruled on anytime.

In the meantime, the next step in the Probate Court is the GAL's motions for 1) formal permission (approval to rack up some fees) to file his amended petition asking Probate court to order the sale of this voting block and then split the cash proceeds into two separate trusts for children of each of the two warring sides; and 2) his petition for court approval to hire a valuation expert to assist the GAL in finalizing, presenting and supporting this petition at trial. Due to extended shelter in place orders in California through the end of May and the court limiting actions to 'emergency/time sensitive' motions, the May 15 hearing on these two motions was moved to July. One might argue the sister's sub-optimal (being kind) management creates an emergency requiring change of control but the sisters beg to differ. LOL. In GAL's last set of filings on these motions, he has suggested that the Probate judge exercise emergency authority and replace the sisters as co-trustees with an independent trustee. However, no formal motion has yet been made on this potentially new and separate positive avenue.
Andrew Shapiro profile picture
@Jamm Systems There is no new M&A with $AMC. I believe Silver Lake Partners has only converted some of its convertible notes and if so it was to facilitate AMCs ability to borrow another $500MM more cash.
the big fella profile picture
@Andrew Shapiro can you give a sense of the odds that the GAL's motions are approved and that the voting block goes up for auction?
It seems this multi-year litigation hasn't gone shareholders way so far - wondering what evidence you see that tells you this motion should turn the tide. Thx
Gregg Sterling profile picture
Am I missing some RDI related news today?
Gregg Sterling profile picture
Cuban bought a few more B shares in the 15's!

What this buy means ...

Cuban: "I'm still here. It's only a matter of time before you lose the steering wheel."
Random Macro Analyst profile picture
The only explanation could be that he's sending a message. Or else he would buy nonvoting shares
Random Macro Analyst profile picture
would he need to file for buying nonvoting?
Jamm Systems profile picture
The family feud is entertaining, but how about solvency?

At the end of 2019, RDI had about $21 million in cash and receivables against $30 million payables plus $37 million in current debt.

I'm wondering if they have solvency risk. And if the company files Chapter 11, what would happen to the family shares?

In my opinion, it's really likely that if the company does a distressed financing here, the family will lose control. If I were a new lender I'd certainly want them to give up control, and since times are very tough right now, I'd say the new lender would have a lot of power in a negotiation.

BTW, when a company is in trouble like this it's not the best time for senior management to be family members with limited operating experience!
Montrealer profile picture
I think you left out $60Mil of untapped liquidity on the credit facility.
Random Macro Analyst profile picture
Yes, they just refinanced and could easily mortgage more properties
Andrew Shapiro profile picture
@Jamm Systems @Montrealer and @ankram are correct about these sources of liquidity and there is a longer term source of sale of non-core real estate assets for far in excess of net book value.
Gregg Sterling profile picture
This non-stop selling pressure is pretty amazing. Especially on a day the market is up around 6% and AMC is up over 20%. RDI is the only red I see on my screen. I would think if someone had so much to sell they would be better served finding a buyer to offload their shares for a discount instead of trying to sell an illiquid stock on the market.
Random Macro Analyst profile picture
It's very unclear to me who it could even be that has this much volume.
Gregg Sterling profile picture
Maybe a long shot but maybe James Jr. could be doing it partially for fun and to put pressure on Ellen and Margaret.
Random Macro Analyst profile picture
He only had 200k shares last time I checked. not nearly enough.
Charlie's Munger profile picture
Alamo Drafthouse, Film Forum and the Angelika are a few of the other theaters testing out the provisional path into digital. Some of the offerings available include Film Movement’s “Corpus Christi,” Robbie Robertson doc “Once Were Brothers” and Oscilloscope’s “Saint Frances.” As with traditional movie stubs, theaters and distributors are splitting proceeds from ticket sales.
Random Macro Analyst profile picture
The guardian is calling for the sisters to be removed as trustees so that a new trustee along with Nevada special commissioner will assume control of company
Andrew Shapiro profile picture
@ankram Yep - this is in ADDITION to the Guardian's current moves to amend his earlier 17200 Petition from 2017 to now ask the court to order the sale of the Grandchildren Voting Trust's control block of $RDIB shares.
Random Macro Analyst profile picture
I read the transcript several times. I do understand the sister's argument. Grandpa wanted this. But circumstances changed and they are clearly quite biased, so the grandchildren need legal protection in the form of an unbiased guardian. Then you would think Sr wanted all his grandchildren treated equally, so I think it's dubious to talk about splitting representation of them into two guardians.
Still, it seems like this can drag out for quite a while still.
Random Macro Analyst profile picture
Can someone explain these new filings in the court proceedings? The cotters appointed a new attorney? Delayed until mid-may?
Random Macro Analyst profile picture
Order - Denying Ex Parte Petition of Co-Trustee James J. Cotter, Jr. for Appointment of Trustee Ad Litem

does this mean the GAL was removed??
Random Macro Analyst profile picture
Ooh. They allowed a guardian for the children but not a trustee to replace the sister?
Andrew Shapiro profile picture
@ankram yes I believe the sisters replaced two of their many firms Quinn Emanuel (one of the highest cost firms in the land) and Sacks Glasier. I guess they didn't like the success (or lack thereof) and/or the costs of these firms. The 3/27 Hearing was rescheduled to 5/15 due to the court's closure to non-essential cases. (Though I would argue that time might be of the essence for the Grandchildren)
"Separately, as has been publicly reported, Ellen Cotter and Vice Chair and Executive Vice President, Margaret Cotter have incurred, and continue to incur, significant legal costs and expenses in litigation relating to matters concerning the estate of their father, James J. Cotter, Sr., and the Living Trust and Voting Trust established by their father. To fund these legal costs and expenses, Ellen Cotter and Margaret Cotter sold some of their personal Class A shares to meet litigation expense commitments. ...

Ellen Cotter and Margaret Cotter made the following statement: “The highest expression of our confidence in the future of Reading is our willingness to devote significant personal assets to support Reading’s long-term business strategy by protecting the Estate’s and Trust’s controlling position in Reading through the litigation.” "

Lordy. Protecting the estate and trust's controlling position indeed.

These ladies continue to liquidate stock at the lowest prices in 10 years. Between the 23rd and 25th they've collectively dumped near 65,000 shares in the low 3s. They are practically giving the shares away at these prices and it explains some of the weakness we have seen of late. Unbelievable.

The good news is the firm's financial flexibility with that $60M line from BAC / Bank of Hawaii through March 2023 and the other $25M refinance extending through April 2023 if they choose. Plus the $12M in cash. They'll definitely weather this storm.
Michael Loftis profile picture
The fact that they are still selling tells us something important, though - they have little other liquid financial resources, which will make it very, very difficult for them to win the bid for the control block once it is put up for sale by the GAL.
Alta500 profile picture
Exactly. In addition, each forced sale at these prices demonstrates the extraordinarily negative impact of RDI stock concentration to the beneficiaries of the trusts - a key factor for the court, it seems to me.
Gregg Sterling profile picture
Probably true. I actually find it amusing that they have to sell at these levels. Serves them right the way they've treated shareholders all these years.
Charlie's Munger profile picture
*Universal Pictures will make its movies available on home entertainment on the same day as the films’ global theatrical releases.
Gregg Sterling profile picture
Yeah I saw that. Almost all major film releases have been delayed. But I guess if people are going to be stuck in their houses for a few weeks it'll be good to have something to watch.
Random Macro Analyst profile picture
How many common shares do the grandchildren own that could be part of offer too?
Andrew Shapiro profile picture
@ankram The grandchildrens trust has 67% of the 1.7MM shares of RDIB outstanding so a little over 1.1MM shares
Random Macro Analyst profile picture
They also own 1.8mm shares common stock, right?
Andrew Shapiro profile picture
The family members, Cotter faimly trust, family foundation and grandkids educational trusts have non-voting RDI shares yes. I don't have the actual number handy and the Trust and sisters have been selling some shares for tax and other reasons. Cotter Jr. sold bunch of shares to fund litigation early on when his trades were required to be disclosed. As no longer an insider, his transactions have not been disclosed. Presume some annual selling to fund living expenses, etc.
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