General Description of Our Business
Reading International, Inc., a Nevada corporation (“RDI”), was incorporated in 1999 incident to our reincorporation in Nevada. Our class A non-voting common stock (“Class A Stock”) and class B voting common stock (“Class B Stock”) are listed for trading on the NASDAQ Capital Market (Nasdaq-CM) under the symbols RDI and RDIB, respectively. Our principal executive offices are located at 6100 Center Drive, Suite 900, Los Angeles, California 90045. Our general telephone number is (213) 235-2240 and our website is www.readingrdi.com. It is our practice to make available free of charge on our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we have electronically filed such material with or furnished it to the Securities and Exchange Commission. In this Annual Report, we from time to time use terms such as the “Company,” “Reading” and “we,” “us,” or “our” to refer collectively to RDI and our various consolidated subsidiaries and corporate predecessors.
We are an internationally diversified “hard asset” company principally focused on the development, ownership and operation of entertainment and real property assets in the United States, Australia, and New Zealand. Currently, we operate in two business segments:
(1)
Cinema Exhibition, through our 57 cinemas, and
(2)
Real Estate, including real estate development and the rental of retail, commercial and live theater assets.
We believe that these two business segments complement one another, as the comparatively consistent cash flows generated by our cinema operations can be used to fund the front-end cash demands of our real estate development business.
At December 31, 2011, the book value of our assets was $430.8 million; and as of that same date, we had a consolidated stockholders’ book equity of $125.0 million. Calculated based on book value, $243.6 million or 57%, of our assets relate to our cinema exhibition activities and $171.0 million or 40%, of our assets relate to our real estate activities.
For additional segment financial information, please see Note 22 – Business Segments and Geographic Area Information to our 2011 Consolidated Financial Statements.
-1-
Recognizing that we are part of a world economy, we have diversified our assets among three countries: the United States, Australia, and New Zealand. We currently have approximately 26% of our assets (based on net book value) in the United States, 57% in Australia and 17% in New Zealand compared to 29%, 55%, and 16% at the end of 2010. For 2011, our gross revenue in these jurisdictions was $112.0 million, $111.6 million, and $22.2 million, respectively, compared to $110.6 million, $94.2 million, and $25.0 million for 2010.
For additional financial information concerning the geographic distribution of our business, please see Note 22 – Business Segments and Geographic Area Information to our 2011 Consolidated Financial Statements.
While we do not believe the cinema exhibition business to be a growth business, we do believe it to be a business that will likely continue to generate fairly consistent cash flows in the years ahead even in recessionary or inflationary environments. This is based on our belief that people will continue to spend some reasonable portion of their entertainment dollar on entertainment outside of the home and that, when compared to other forms of outside the home entertainment, movies continue to be a popular, and competitively priced option. However, since we believe the cinema exhibition business to be a mature business with most markets either adequately screened or over-screened, we see our future asset growth coming more from our real estate development activities and from the acquisition of existing cinemas rather than from the development of new cinemas. Over time, we anticipate that our cinema operations will become increasingly a source of cash flow to support our real estate oriented activities, rather than a focus of growth, and that our real estate activities will, again, over time become the principal thrust of our business. We also, from time to time, invest in the securities of other companies, where we believe the business or assets of those companies to be attractive or to offer synergies to our existing entertainment and real estate businesses. Also, in the current environment, we intend to be opportunistic in identifying and endeavoring to acquire undervalued assets, particularly assets with proven cash flow and which we believe to be resistant to current recessionary trends.
In recent years, the market value of most commercial and undeveloped real estate has seen a material decline in the markets in which we operate. While this decline has been, in our view, less pronounced in Australia and New Zealand than in the United States (and while the impact of the declines in Australia and New Zealand have been somewhat mitigated by renewed strength of the Australian and New Zealand dollar as compared to the US dollar), real estate values today are in many cases less than they were at the end of 2007. This has affected some of our development projects resulting in impairment losses. However, the practical impact on our real estate holdings has been minimal, as we have continued to enjoy increases in rentals from the tenants in our retail holdings, and as our strategy generally calls for development of our raw land holdings over time for long-term development. On an overall or portfolio basis, our estimated value of our real estate and cinema assets has not in fact declined since the end of 2008. Furthermore, in our view, it appears that values have stabilized in the markets in which we operate. 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.
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In light of uncertainties in the real estate and financial markets in recent periods, and the need to focus our attention on the renewal and preservation of our various lending facilities we have generally delayed our plans for development of our various properties. In 2010, we were advised by our principal lender, BOS International (“BOSI”), in Australia that it was curtailing lending activities in that country, and would not be renewing our $115.8 million (AUS$110.0 million) credit facility. However, on June 24, 2011, we replaced that facility with a new three-year credit facility from National Australia Bank (“NAB”) in the amount of $110.5 million (AUS$105.0 million). On December 1, 2010, we refinanced our $29.5 million credit facility with GE Credit with a new $37.5 million facility, which expires on December 1, 2015, and, on February 8, 2012, we received an approved amendment from Westpac renewing our existing $35.1 million (NZ$45.0 million) New Zealand credit facility with a three-year $31.2 million (NZ$40.0 million) credit facility.
Historically, it has not been our practice to sell assets, except in connection with the repositioning of such assets to a higher and better use. This was the situation, for example, in our sale of our interests in two Manhattan cinemas: the Sutton Cinema (redeveloped as a residential condominium complex commonly known as Place 57) and the Murray Hill Cinema (redeveloped as a hospital commonly known as NYU Clinical Cancer Center). However, in the current market, given the difficulty in obtaining leverage on attractive terms and our interest in now moving forward with the development or redevelopment of certain of our real property assets, we anticipate the sale of certain real estate assets such as our Cinemas 1, 2 & 3 property in Manhattan, our 0.54 acre property in Taringa, Australia and our 1.0 acre property in Lake Taupo, New Zealand (recently rezoned for residential purposes). Over the past year, we have also had substantive negotiations with third-party developers regarding the development of our Burwood property in Melbourne and our Union Square property in Manhattan. We have continued to add to our overall real estate holdings in recent periods by acquiring the fee interest in a property (aggregating approximately 6.4 acres) adjoining our 64.0 acre property in Manukau, New Zealand enhancing its accessibility, and by acquiring a 50% interest in the limited liability company that acquired an approximately 202-acre property in Riverside County, California which, while zoned residential and approved for 823 single family lots, is currently being used for agricultural purposes. The Riverside property was acquired in January 2012 in a foreclosure sale for $5.5 million.
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. Also, we are actively pursuing the development of the next phase of our Courtenay Central property in Wellington, New Zealand. We continue to evaluate our options concerning our 50.6 acre Burwood property in Melbourne, Australia.
It is anticipated that our 3.3 acre holdings in the Moonee Ponds area of Melbourne will benefit from the new structure plan adopted for Moonee Ponds, which has increased the density permitted at the site from ten to sixteen stories.
Consistent with our philosophy of acquiring proven cash-flowing cinemas, in February 2008, we acquired fifteen leasehold cinemas in Hawaii and California representing 181 screens for an adjusted purchase price of $46.8 million. These cinemas produced gross revenue of $75.7 million in 2011. In 2010, we opened a new 8-screen cinema in Australia and are currently fitting out a new 8-screen “Angelika” branded cinema in the Greater Washington D.C. area. We also acquired an existing 17-screen cinema in Southern California for $4.2 million in August 2011.
We continue our efforts to upgrade the quality of our cinema offerings. Over the past two years we have added digital 3D capacity to 63 screens, and we have converted several theater auditoriums to a premium “gold class” formats. We anticipate over the next 24 months converting substantially all of our cinema auditoriums to digital.
Historically, we have endeavored to match the currency in which we have financed our development with the jurisdiction within which these developments are located. However, in February 2007 we broke with this policy and privately placed $50.0 million of 20-year trust preferred securities (“TPS”), with dividends fixed at 9.22% for the first five years, to serve as a long-term financing foundation for our real estate assets and to pay down our New Zealand and a portion of our Australian dollar denominated debt. Although structured as the issuance of TPS by a related trust, the financing is essentially the same as an issuance of fully subordinated debt: the payments are tax deductible to us and the default remedies are the same as debt. During the first quarter of 2009, we returned somewhat to our debt-to-local-currency matching policy by taking advantage of the then current market illiquidity for TPS to repurchase $22.9 million in face value of our TPS for $11.5 million. As a result of this transaction, in 2009, we recorded a $10.7 million gain on retirement of subordinated debt. In addition, in December 2008 we secured a waiver of all financial covenants with respect to our TPS for a period of nine years (through December 2017), in consideration of the payment of $1.6 million, consisting of an initial payment of $1.1 million, a payment of $270,000 made in December 2011 and a contractual obligation to pay $270,000 in December 2014. In the event that the remaining payment is not made, the only remedy is the termination of the waiver.