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Reading International – Third Quarter 2011 results

Press Release – Lawndale Capital Management

Reading International (NASDAQ-RDI) recently reported its Third Quarter 2011 results with revenues, Op Income and Op Margin were much improved over last year. The company has now recently filed its more detailed 10-Q.Reading International (NASDAQ-RDI) recently reported its Third Quarter 2011 results with revenues, Op Income and Op Margin were much improved over last year. The company has now recently filed its more detailed 10-Q.

Full Press Release:

Our summary of salient points:
Reading Int’l 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’s revenues were down only $0.5MM y/y on lower live theater performance rents vs prior year non-recurring boost. Cinema segment revenue growth was primarily the result of increases in Australian average ticket price and increases in attendance in both the US and Australia partially offset by a decrease in attendance in New Zealand.

Q3’s Operating Income (EBIT) jumped 27.2% from prior year to $7.1MM. Q3’s Operating EBITDA (Operating Income + Dptn/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 offset slightly with small declines in its Real estate segment vs. prior year Margins jumped from prior year, benefiting from operating leverage on fuller theaters, higher ticket prices and increased revenue mix from concessions, which carry much higher margin that admissions.

• It is noteworthy that New Zealand’s Q3 and YTD y/y results have been further weakened by the closure (earthquake damage) of Reading’s Palms multiplex in Christchurch since the February 2011 earthquake. This cinema is now scheduled to reopen in the middle of the current Q4 on November 17, 2011. Reading has earthquake and lost profits insurance on this cinema that will additionally 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.

• General & Administrative expenses for the period include some amount of non-recurring severance and temporarily duplicated labor costs associated with Reading’s consolidating transfer of accounting functions in the US and Australia to single Wellington, New Zealand location.

• Global box office releases scheduled for the remainder of the year and into 2012 contain 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. We believe this book value still 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 NOL’s without any expiration date, respectively, and $26.5MM of US NOL’s expiring in 2025 and thereafter.

10-Q detailed disclosures of note:
• For the first time in memory, Reading bought back stock for a 2nd consecutive quarter, purchasing 50,000 shares for an average of $434/share. So far this year Reading has bought back 72,300 shares for a cost of $328K, or an average of $4.54/share.

• 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 – $4.3MM, comprised of $3.9MM in cash and ‘credit’ from a prior loan Reading made to the former owner and a $250K holdback note maturing in January. The acquisition only partially benefited this quarter, but, as the multiplex is further integrated and improved, should nicely to Reading’s US cinema results over the coming year.

• During the quarter, RDI took out letters of credit to begin the construction process for a new 8-screen Angelika Film Center cinema to be built in the Mosiac District development in the Greater Washington DC area.

• With respect to Reading’s large 50+ -acre Burwood Square development parcel in Melbourne, incremental language appeared in this 10-Q 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” 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” (AUS$52.1 million.) This Burwood parcel remains completely mortgage free.

• Reading has also disclosed, earlier this year, that it is exploring the potential sale or JV development of both its Cinema 123 and Union Square Theater properties in Manhattan, New York City.

• Reading finished the September quarter with substantial liquidity. At September 30, 2011, Reading had cash and marketable securities of $31.7MM plus a combined $28.2MM of undrawn availability on its several lines of credit. Additionally, Reading has several unencumbered parcels and an effective shelf registration for up to $100MM of securities to enable Reading to act quickly to finance growth transactions. Reading’s 9/30/11 Net Debt of $175MM is $10.7MM lower than 6/30/11 as a result of continued strong cash flow generation and decline in currency exchange rates on Reading’s foreign denominated debt.

• 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 5-year installment note consisting of monthly payments of $290K. Reading also anticipates that the interest portion of these payments will be deductible from future federal and state income.

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