Item 2 – Management’s Discussions and Analysis (“MD&A”) of Financial Condition and Results of Operations
BUSINESS OVERVIEW
We are an internationally diversified company principally focused on the development, lease or ownership, and operation of
entertainment and real estate assets in the United States, Australia, and New Zealand. As of
June 30, 2019
, we operate in two business segments:
|
·
|
|
Cinema
exhibition, through our
60
multiplex cinemas; and,
|
|
·
|
|
Real
estate, including real estate development and the rental of retail, commercial and live theatre assets.
|
We believe that these two business segments complement one another, as we can use the comparatively consistent cash flows generated by our cinema operations to fund the front-end cash demands of our real estate development business.
Cinema Exhibition Overview
We manage our worldwide cinema exhibition businesses under various brands:
|
·
|
|
in the U.S., under the following brands: Reading Cinemas, Angelika Film Centers, Consolidated Theatres, and City Cinemas;
|
|
·
|
|
in
Australia
, under the Reading Cinemas brand; and,
|
|
·
|
|
in
New
Zealand, under the Reading Cinemas and Rialto Cinemas brands.
|
Shown in the following table are the number of locations and theater screens in our theater circuit in each country, by state/territory/ region and indicating our cinema brands and our interest in the underlying assets as of June 30, 2019.
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State / Territory /
|
|
Location
|
|
Screen
|
|
Interest in Asset
Underlying the Cinema
|
|
|
Country
|
|
Region
|
|
Count
|
|
Count
|
|
Leased
|
|
Owned
|
|
Operating Brands
|
United States
|
|
Hawaii
|
|
9
|
|
98
|
|
9
|
|
|
|
Consolidated Theatres
|
|
|
California
|
|
7
|
|
88
|
|
7
|
|
|
|
Reading Cinemas, Angelika Film Center
|
|
|
New York
|
|
5
|
|
19
|
|
4
|
|
1
|
|
Angelika Film Center, City Cinemas
|
|
|
Texas
|
|
2
|
|
13
|
|
2
|
|
|
|
Angelika Film Center
|
|
|
New Jersey
|
|
1
|
|
12
|
|
1
|
|
|
|
Reading Cinemas
|
|
|
Virginia
|
|
1
|
|
8
|
|
1
|
|
|
|
Angelika Film Center
|
|
|
Washington DC
|
|
1
|
|
3
|
|
1
|
|
|
|
Angelika Film Center
|
|
|
U.S. Total
|
|
26
|
|
241
|
|
25
|
|
1
|
|
|
Australia
|
|
New South Wales
|
|
6
|
|
44
|
|
4
|
|
2
|
|
Reading Cinemas
|
|
|
Victoria
|
|
6
|
|
43
|
|
6
|
|
|
|
Reading Cinemas
|
|
|
Queensland
|
|
5
|
|
50
|
|
2
|
|
3
|
|
Reading Cinemas, Event Cinemas
(1)
|
|
|
Western Australia
|
|
2
|
|
16
|
|
1
|
|
1
|
|
Reading Cinemas
|
|
|
South Australia
|
|
2
|
|
15
|
|
2
|
|
|
|
Reading Cinemas
|
|
|
Tasmania
|
|
1
|
|
4
|
|
1
|
|
|
|
Reading Cinemas
|
|
|
Australia Total
|
|
22
|
|
172
|
|
16
|
|
6
|
|
|
New Zealand
|
|
Wellington
|
|
3
|
|
18
|
|
2
|
|
1
|
|
Reading Cinemas
|
|
|
Otago
|
|
3
|
|
15
|
|
2
|
|
1
|
|
Reading Cinemas, Rialto Cinemas
(2)
|
|
|
Auckland
|
|
2
|
|
15
|
|
2
|
|
|
|
Reading Cinemas, Rialto Cinemas
(2)
|
|
|
Canterbury
|
|
1
|
|
8
|
|
1
|
|
|
|
Reading Cinemas
|
|
|
Southland
|
|
1
|
|
5
|
|
|
|
1
|
|
Reading Cinemas
|
|
|
Bay of Plenty
|
|
1
|
|
5
|
|
|
|
1
|
|
Reading Cinemas
|
|
|
Hawke's Bay
|
|
1
|
|
4
|
|
|
|
1
|
|
Reading Cinemas
|
|
|
New Zealand Total
|
|
12
|
|
70
|
|
7
|
|
5
|
|
|
GRAND TOTAL
|
|
|
|
60
|
|
483
|
|
48
|
|
12
|
|
|
|
(1)
|
|
Included above, the
Company has a 33.3% unincorporated joint venture interest in a 16-screen cinema located in Mt. Gravatt, Queensland managed by Event Cinemas.
|
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(2)
|
|
Included above, the Company is a 50% joint venture partner in two New Zealand Rialto cinemas, with a total of 13-screens. We are responsible for the booking of these cinemas and our joint venture partner, Event Cinemas, manages their day-to-day operations.
|
Real Estate Overview
We engage in real estate development and the ownership, and rental or licensing to third parties of retail, commercial and live theater assets. We own the fee interests in all three of our live theatres, and in
12
of our cinemas (as presented in the preceding table). Our real estate business creates long-term value for our stockholders through the continuous improvement and development of our investment and operating properties, including our entertainment-themed centers (“ETCs”).
Our real estate activities have historically consisted principally of:
|
·
|
|
the ownership of fee or long-term leasehold interests in properties used in our cinema exhibition activities or which were acquired for the development of cinemas or cinema-based real estate development projects;
|
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·
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the
acquisition
and development of fee interests in land;
|
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·
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|
the
licensing
to production companies of the use of our live theatres; and,
|
|
·
|
|
the
redevelopment
of our existing fee-owned cinema or live theatre sites to their highest and best use.
|
Cinema Exhibition
Our cinema revenue consists primarily of admissions, Food & Beverage (“F&B”), advertising, gift cards, theater rentals and online convenience fee revenue generated by the sale of our cinema tickets on our own websites and apps. Cinema operating expense consists of the costs directly attributable to the operation of the cinemas, including film rent expense, operating costs, and occupancy costs. Cinema revenue and expense fluctuate with the availability of quality first run films and the numbers of weeks such first run films stay in the market. For a breakdown of our current cinema assets that we previously owned and/or managed, please see Part I, Item 1 –
Our Business
of our
2018
Form 10-K.
While our capital projects in recent years have been focused in growing our real estate segment, we have over the past two years also placed special emphasis on the expansion and upgrading of our cinema exhibition portfolio, as discussed below:
Cinema Additions (including refurbishments and re-openings)
The latest additions and enhancements to our cinema portfolio are as follows:
|
·
|
|
Opening our first dine-in concept, “Spotlight” in the United States:
On March 30, 2018 we finished the conversion of one wing (six auditoriums) at our Reading Cinema in Murrieta, California (Cal Oaks) to our dine-in concept brand, “Spotlight”.
|
|
·
|
|
AU and NZ Additions/Refurbishments
:
On January 30, 2019, we purchased the tenant’s interest and other operating assets of an established four-screen cinema in Devonport, Tasmania, Australia, for $1.4 million (AU$1.95 million). We commenced trading from this new cinema site on January 30, 2019. For the first half of 2019, we invested in two additional Gold Lounge auditoriums at our Harbour Town cinema, and added significant improvements at The Palms
, Maitland
and Waurn Ponds.
During January 2019, we
temporarily
closed our Courtenay Central cinema, servicing the Wellington market, due to seismic concerns. In order to service this market while we develop our plans for the redevelopment of Courtenay Central, we ha
ve opened a three screen, 440 seat pop up cinema in Lower Hutt, a suburb of Wellington, New Zealand.
In 2017 and 2018, we improved
the following
theaters: Belmont, Rouse Hill, Napier, Charlestown, Elizabeth, Auburn and Rotorua.
|
|
·
|
|
U.S. Refurbishments:
For the first half of 2019, we continued investing in refurbishments at our Mililani,
and
Kahala cinemas
in Hawaii
.
Since
2017, we
have
continued to invest in the refurbishment and enhancements of our existing cinemas, as contemplated by
our strategic plan. During 2017 and 2018, we substantially refurbished
seven locations
:
our Cal Oaks, Valley Plaza and Grossmont
cinemas
in California; our Ward
, Pearlridge,
and Mililani locations in Hawaii; and our Manville
cinema
in New Jersey.
|
Cinema Pipeline
W
e currently plan to upgrade or begin the upgrade of 1
1
cinemas in the U.S
., Australia, and New Zealand between now and the end of the year.
We have entered into lease agreements for four new cinemas in Australia (25 screens), which we anticipate will come online in 2019 - 2021.
Our focus with respect to new cinemas is on featuring state-of-the-art projection and sound, luxury recliner seating, enhanced F&B (typically including alcohol service) and at least one major TITAN type presentation screen. We are emphasizing best in class services and amenities in order to differentiate ourselves from in-home and mobile viewing options. We believe that a night at the movies should be a special and premium experience and, indeed, that it must be in order to compete with the variety of options being offered to consumers through other platforms.
Throughout 2019, we will continue to focus on the rollout and enhancement of our proprietary online ticketing capabilities and social media interfaces. These are intended to enhance the convenience of our offering and to promote customer affinity with the experience and product that we are offering.
Cinema Closures
We evaluate the performance of each of our cinemas and, in some instances, we may decide to close an operation when it is not economically viable to continue to operate from the location. We did not close any leasehold theaters in 2018 or to date in 2019. While some of our theaters have encountered new competition, and while we believe that others will benefit from planned refurbishment and upgrading, none of our leased theaters are currently slated for closure.
During January 2019, we temporarily closed our Courtenay Central cinema in Wellington, New Zealand due to seismic concerns. We are currently assessing the redevelopment of that property. It is currently anticipated that the cinema component will be upgraded and restored in connection with any such redevelopment.
Upgrades to our Film Exhibition Technology and Theater Amenities
As a part of our program to bring long-term value to our stockholders, we continue to explore cinema markets where we believe there to be an ongoing growth potential and to upgrade the technology and amenities offered at our existing sites. These include (i) upgrading of our existing cinemas and (ii) developing new cinemas to provide our customers with premium offerings, including state-of-the-art presentation (including sound, lounges
and bar service
) and luxury seating. The upgrades to our theater circuits’ film exhibition technology and amenities are summarized in the following table (including joint ventures):
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|
|
|
|
|
|
|
|
Location
Count
|
|
Screen
Count
|
Screen Format
|
|
|
|
Digital (all cinemas in our theater circuit)
|
60
|
|
483
|
IMAX
|
1
|
|
1
|
TITAN XC and LUXE
|
20
|
|
22
|
Dine-in Service
|
|
|
|
Gold Lounge (AU/NZ)
(1)
|
10
|
|
27
|
Premium (AU/NZ)
(2)
|
12
|
|
22
|
Spotlight (U.S.)
(3)
|
1
|
|
6
|
Upgraded Food & Beverage menu (U.S.)
(4)
|
15
|
|
n/a
|
Premium Seating
(recliner seating features)
|
25
|
|
146
|
Liquor Licenses Obtained
(5)
|
27
|
|
n/a
|
|
(1)
|
|
Gold Lounge
: This is our "
First Class Full Dine-in Service
" in our Australian and New Zealand cinemas, which includes upgraded F&B menu (with alcoholic beverages), luxury recliner seating features (intimate 25-50 seat cinemas) and waiter service.
|
|
(2)
|
|
Premium Service
: This is our "
Business Class Dine-in Service
" in our Australian and New Zealand cinemas, which typically includes upgraded F&B menu (some with alcoholic beverages) and may include luxury recliner seating features (less intimate 80-seat cinemas), but no waiter service.
|
|
(3)
|
|
Spotlight Service:
On March 30, 2018 we opened “Spotlight,” our first dine-in cinema concept in the United States at Cal Oaks. Six of our 17 auditoriums at this theater feature this dine-in concept.
|
|
(4)
|
|
Upgraded Food & Beverage Menu:
Fifteen of our U.S. theaters feature an elevated food and beverage menu served from a common counter, which includes, without limitation, beer, wine and/or spirits and a food menu beyond traditional concessions. We have worked with former Food Network executives to create a menu of locally inspired and freshly prepared items.
|
|
(5)
|
|
Liquor Licenses:
Licenses are applicable at each cinema location, rather than each theatre auditorium. For accounting purposes, we capitalize the cost of successfully purchasing or applying for liquor licenses meeting certain thresholds as an intangible asset due to long-term economic benefits derived on future sales of alcoholic beverages (excluding joint ventures).
|
Real Estate
Our operating properties currently consists of the following assets:
|
·
|
|
our Newmarket, Queensland ETC, our Belmont, Western Australia ETC, our Auburn, New South Wales ETC, our Townsville, Queensland ETC, our Wellington, New Zealand ETC, and our Cinema 1,2,3, New York, NY;
|
|
·
|
|
two single-auditorium live theatres in Manhattan (Minetta Lane and Orpheum) and a four-auditorium live theater complex (including the accompanying ancillary retail and commercial tenants) in Chicago (The Royal George);
|
|
·
|
|
our Worldwide Headquarters building in Culver City, California and our Australia corporate office building in Melbourne, Australia; and,
|
|
·
|
|
the ancillary retail and commercial space at some of our non-ETC cinema properties.
|
We currently license our Minetta Lane theatre to Audible, Inc. a subsidiary of Amazon. This agreement continues through March 2020, and Audible has an option to extend for one additional year through March 2021. We are advised that Audible intends to produce plays featuring a limited cast of one or two characters and special live performance engagements, record those productions and make them available to the public through the Audible streaming
service.
In addition, we have various parcels of unimproved real estate held for development in Australia and New Zealand and certain unimproved land in the United States, including some that was used in our legacy activities.
Our key real estate transactions in recent years are as follows:
Strategic Acquisitions
|
·
|
|
Purchase of Land at Cannon Park, Australia
–
On June 13, 2018, we acquired a 163,000 square foot (15,150 square meter) parcel at our Cannon Park ETC, in connection with the restructuring of our relationship with the adjacent land owner. Prior to the restructuring, this parcel was commonly owned by us and the adjoining land owner. In the restructuring, the adjoining land owner conveyed to us its interest in the parcel for AU$1. We granted the adjoining land owner certain access rights.
|
|
·
|
|
Purchase of Property in Auburn, Australia
–
On June 29, 2018, we added 20,870 square feet of land, improved with a 16,830 square foot office building, to our Auburn/Redyard ETC. The property was acquired at auction for $3.5 million (AU$4.5 million) and is bordered by our existing ETC on three sides. The property is leased to Telstra through July 2022. This will allow us time to plan for the efficient integration of the property into our ETC.
The final settlement payment was made in early October 2018
.
|
Value-creating Opportunities
We are engaged in several real estate development projects to take our properties to their highest and best use. The most notable of these value-creating projects are as follows:
|
·
|
|
Redevelopment of 44 Union Square Property in New York, U
.
S
. During
July 2019, we topped out the steel
dome capping our redevelopment of historic Tammany Hall at 44 Union Square. We anticipate that the project will be ready for the commencement
of tenant fit-out in the near future, and are in final negotiations of a long term lease for approximately 90% of the net rentable area of the building.
|
|
·
|
|
Expansion Project for our Newmarket Shopping Center at an affluent suburb of Brisbane, Australia
. In December 2017 we opened our eight-screen Reading Cinema with TITAN LUXE,
including 10,355 square feet of additional retail space
and 124 parking spaces
. As of
June 30, 2019
, approximately
80%
of this new retail space has been leased.
|
|
·
|
|
Courtenay Central Re-Development in Wellington, New Zealand
. Located in the heart of Wellington - New Zealand’s capital city – this center is comprised of 161,071 square feet of land situated proximate to the Te Papa Tongarewa Museum (attracting over 1.5 million visitors annually), across the street from the site of Wellington’s newly announced convention center (estimated to open its doors in 2022) and at a major public transit hub. Damage from the 2016 earthquake necessitated demolition of our nine-story parking garage at the site. Further, unrelated seismic issues have caused us to temporarily close the existing cinema and significant portions of the retail structure while we reevaluate the property for redevelopment as an entertainment themed urban center with a major food and grocery component. Wellington continues to be rated as one of the top cities in the world in which to live, and we continue to believe that the Courtenay Central site is located in one of the most vibrant and growing commercial and entertainment precincts of Wellington. We are currently working on a comprehensive plan for the redevelopment of this property featuring a variety of uses to compliment and build upon the “destination quality” of this location.
|
|
§
|
|
Cinema 1,2,3 Redevelopment
– In June 2017, we entered into an exclusive dealing and pre-development agreement with our adjoining neighbors, 260-264 LLC, to jointly develop the properties, currently home to Cinemas 1,2,3 and Anassa Taverna. Under the terms of the agreement, Reading and 260-264 LLC worked together on a comprehensive mixed-use plan to co-develop the properties located on 3rd Avenue, between 59th Street and 60th Streets, in New York City. The parties completed an initial feasibility study, analyzing various retail, entertainment and residential uses for the site and during 2018 continued to work on the terms of a final agreement for the development of the combined property. We do not presently believe that we will be able to come to an agreement with our neighbors for a joint development of our properties and, have, accordingly, begun developing plans for an approximately 96,000 square foot mixed use stand-alone development. Our Cinemas 1,2,3 property is
located on Third Avenue in New York City, between 59th and 60th Streets across from Bloomingdales.
|
|
·
|
|
Manukau Land Rezoning
– In August 2016, the Auckland City Council up-zoned 64.0 acres of our property in Manukau from agricultural to light industrial use. The remaining 6.4 acres were already zoned for heavy industrial use.
With o
ur zoning enhancement goal having been achieved,
in 2018, we worked with adjoining landholders to jointly advance necessary infrastructure improvement issues. We estimate that our property will support approximately 1.6 million square feet of improvements.
We see this property as a future value realization opportunity for us. This tract is adjacent to the Auckland Airport, which is currently undergoing a major improvement and expansion project.
|
Corporate Matters
|
§
|
|
Stock Repurchase Program
– Our Board approved a
$25-million
r
epurchase
program
on March 2, 2017,
and extended it on March 14, 2019. Under this authorization R
eading
may
repurchase its Class A
Non-Voting Common
Stock from time to time in accordance with the requirements of the Securities and Exchange Commission on the open market, in block trades and in privately negotiated transactions,
depending on market conditions and other factors. The new authorization continues through March 2, 2021. To date we have repurchased
756,016
shares of Class A
Non-Voting
Common Stock
at
$15.16
per share (excluding transaction costs).
196,389
shares were purchased during the quarter ended
June 30, 2019
, at an average price of
$13.33
per share. As of June 30, 2019, this left
$13.5
million available under the March 2, 2017 program, as extended, for repurchase.
|
Our Financing Strategy
Our treasury management is focused on cash management using cash balances to reduce debt. We have used cash generated from operations and other excess cash, to the extent not needed for capital expenditures, to pay down o
ur loans and credit facilities providing us flexibility on our available loan facilities for future use and, thereby, reducing interest charges. On a periodic basis, we review the maturities of our borrowing arrangements and negotiate for renewals and extensions where necessary in the current circumstances.
On March 15, 2019, we amended our Revolving Corporate Markets Loan Facility with National Australia Bank (“NAB”) from a facility comprised of (i) a AU$66.5 million loan facility with an interest rate of 0.95% above the Bank Bill Swap Bid Rate (“BBSY”) and a maturity date of June 30, 2019 and (ii) a bank guarantee of AU$5.0 million at a rate of 1.90% per annum into a (i) AU$120.0 million corporate loan facility at rates of 0.85%-1.30% above BBSY depending on certain ratios with a due date of December 31, 2023, of which AU$80.0 million is revolving and AU$40.0 million is core and (ii) a bank guarantee facility of AU$5.0 million at a rate of 1.85% per annum. Such modifications of this particular term loan were not considered to be substantial under US GAAP.
On December 20, 2018, we restructured our Westpac Corporate Credit Facilities. The maturity of the 1
st
tranche (general/non-construction credit line) was extended to December 31, 2023, with the available facility being reduced from NZ$35.0 million to NZ$32.0 million. The facility bears an interest rate of 1.75% above the Bank Bill Bid Rate on the drawn down balance and a 1.1% line of credit charge on the entire facility. The 2
nd
tranche (construction line) with a facility of NZ$18.0 million was removed.
On August 8, 2019,
we extended our current Bank of America credit facilities until September 1, 2020 (the $55.0 million credit line). We anticipate refinancing this credit line during the third quarter of 2019.
Refer to our 2018 Form 10-K for more details on our cinema and real estate segments.
RESULTS OF OPERATIONS
The table below summarize
s
the results of operations for each of our principal business segments along with the non-segment information for the
quarter and six months ended
June 30, 2019
and
June 30, 2018
, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
% Change
|
|
Six Months Ended
|
|
% Change
|
(Dollars in thousands)
|
|
June 30,
2019
|
|
June 30,
2018
|
|
Fav/
(Unfav)
|
|
June 30,
2019
|
|
June 30,
2018
|
|
Fav/
(Unfav)
|
SEGMENT RESULTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cinema exhibition
|
|
$
|
72,383
|
|
|
80,183
|
|
(10)
|
%
|
|
$
|
130,368
|
|
$
|
152,438
|
|
(14)
|
%
|
|
Real estate
|
|
|
5,564
|
|
|
6,425
|
|
(13)
|
%
|
|
|
10,994
|
|
|
12,432
|
|
(12)
|
%
|
|
Inter-segment elimination
|
|
|
(1,851)
|
|
|
(2,346)
|
|
21
|
%
|
|
|
(3,716)
|
|
|
(4,737)
|
|
22
|
%
|
|
Total revenue
|
|
|
76,096
|
|
|
84,262
|
|
(10)
|
%
|
|
|
137,646
|
|
|
160,133
|
|
(14)
|
%
|
|
Operating expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cinema exhibition
|
|
|
(58,086)
|
|
|
(62,652)
|
|
7
|
%
|
|
|
(108,280)
|
|
|
(119,991)
|
|
10
|
%
|
|
Real estate
|
|
|
(2,438)
|
|
|
(2,551)
|
|
4
|
%
|
|
|
(4,883)
|
|
|
(4,935)
|
|
1
|
%
|
|
Inter-segment elimination
|
|
|
1,851
|
|
|
2,346
|
|
(21)
|
%
|
|
|
3,716
|
|
|
4,737
|
|
(22)
|
%
|
|
Total operating expense
|
|
|
(58,673)
|
|
|
(62,857)
|
|
7
|
%
|
|
|
(109,447)
|
|
|
(120,189)
|
|
9
|
%
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cinema exhibition
|
|
|
(4,091)
|
|
|
(4,082)
|
|
-
|
%
|
|
|
(8,247)
|
|
|
(7,847)
|
|
(5)
|
%
|
|
Real estate
|
|
|
(1,354)
|
|
|
(1,440)
|
|
6
|
%
|
|
|
(2,731)
|
|
|
(2,809)
|
|
3
|
%
|
|
Total depreciation and amortization
|
|
|
(5,445)
|
|
|
(5,522)
|
|
1
|
%
|
|
|
(10,978)
|
|
|
(10,656)
|
|
(3)
|
%
|
|
General and administrative expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cinema exhibition
|
|
|
(937)
|
|
|
(955)
|
|
2
|
%
|
|
|
(1,929)
|
|
|
(1,821)
|
|
(6)
|
%
|
|
Real estate
|
|
|
(427)
|
|
|
(480)
|
|
11
|
%
|
|
|
(878)
|
|
|
(1,054)
|
|
17
|
%
|
|
Total general and administrative expense
|
|
|
(1,364)
|
|
|
(1,435)
|
|
5
|
%
|
|
|
(2,807)
|
|
|
(2,875)
|
|
2
|
%
|
|
Segment operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cinema exhibition
|
|
|
9,269
|
|
|
12,494
|
|
(26)
|
%
|
|
|
11,912
|
|
|
22,779
|
|
(48)
|
%
|
|
Real estate
|
|
|
1,345
|
|
|
1,954
|
|
(31)
|
%
|
|
|
2,502
|
|
|
3,634
|
|
(31)
|
%
|
|
Total segment operating income
|
|
$
|
10,614
|
|
$
|
14,448
|
|
(27)
|
%
|
|
$
|
14,414
|
|
$
|
26,413
|
|
(45)
|
%
|
NON-SEGMENT RESULTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
(127)
|
|
|
(104)
|
|
(22)
|
%
|
|
|
(188)
|
|
|
(221)
|
|
15
|
%
|
|
General and administrative expense
|
|
|
(4,670)
|
|
|
(5,730)
|
|
18
|
%
|
|
|
(9,710)
|
|
|
(11,886)
|
|
18
|
%
|
|
Interest expense, net
|
|
|
(2,204)
|
|
|
(1,790)
|
|
(23)
|
%
|
|
|
(4,055)
|
|
|
(3,384)
|
|
(20)
|
%
|
|
Equity earnings of unconsolidated joint ventures
|
|
|
327
|
|
|
331
|
|
(1)
|
%
|
|
|
361
|
|
|
588
|
|
(39)
|
%
|
|
Other income (expense)
|
|
|
71
|
|
|
(61)
|
|
>100
|
%
|
|
|
50
|
|
|
(143)
|
|
>100
|
%
|
|
Income before income taxes
|
|
|
4,011
|
|
|
7,094
|
|
(43)
|
%
|
|
|
872
|
|
|
11,367
|
|
(92)
|
%
|
|
Income tax benefit (expense)
|
|
|
(1,654)
|
|
|
(1,965)
|
|
16
|
%
|
|
|
(612)
|
|
|
(3,135)
|
|
80
|
%
|
Net income (loss)
|
|
|
2,357
|
|
|
5,129
|
|
(54)
|
%
|
|
|
260
|
|
|
8,232
|
|
(97)
|
%
|
|
Less: net (income) loss attributable to noncontrolling interests
|
|
|
(37)
|
|
|
102
|
|
(>100)
|
%
|
|
|
(53)
|
|
|
124
|
|
(>100)
|
%
|
Net income (loss) attributable to RDI common stockholders
|
|
$
|
2,394
|
|
$
|
5,027
|
|
(52)
|
%
|
|
$
|
313
|
|
$
|
8,108
|
|
(96)
|
%
|
Basic EPS
|
|
$
|
0.10
|
|
$
|
0.22
|
|
(55)
|
%
|
|
$
|
0.01
|
|
$
|
0.35
|
|
(97)
|
%
|
Consolidated and Non-Segment Results:
2
nd
Quarter and Six Months Net Results
Net income attributable to RDI common stockholders
decreased
by
52%
, or
$2.6
million, to
$2.4
million for the quarter ended June 30, 2019, compared to the same period in the prior year. Basic EPS for the quarter ended June 30, 2019,
decreased
by
$0.12
, to
$0.10
compared to the quarter
ended
June 30, 2018
, mainly attributed to decreases in revenue in both the Cinema and Real Estate business
segments
and despite an
18%
reduction in general and administrative expenses.
Net income attributable to RDI common stockholders
decreased
by
96%
, or
$7.8
million, to
$0.3
million for the six months ended June 30, 2019 compared to the same period prior year
.
Basic EPS for the
six
months ended
June 30, 2019
,
decreased
by
$0.34
, to
$0.01
compared to the six months ended June 30, 2018, mainly attributable to decreases in revenue in both the Cinema and Real Estate business segments and despite a similar percentage decrease in general and administrative expenses as for the quarter.
Revenue for the quarter ended
June 30, 2019
decreased
by
10%
, or
$8.2
million, to
$76.1
million compared to the same period prior year.
Revenue for the six months ended June 30, 2019 decreased by
14%
, or $
22.5
million, to $
137.6
million compared to the same period prior year. The revenue decreases were due to a (i) decrease in revenue from our cinema business primarily due
to the soft film slate experienced by the Cinema business segment worldwide, (ii) and a decrease in revenue from the Real Estate business segment primarily due to the closure of most of the net rentable area of Courtenay Central due to seismic concerns. Overseas revenues were also adversely impacted by the continued weakening of the Australian and New Zealand Dollar compared to the U.S. dollar.
Due to the fact that our occupancy costs with respect to our cinema operations are
mostly
fixed, the decrease in revenues disproportionally impacts the earnings from these operations, even though our film rent, cinema level labor and costs of goods sold are largely variable
.
I
n the case of New Zealand, the situation was
exacerbated by
the
temporary c
losure of ou
r cinema at Courtenay Central. In order to partially compensate for the loss of our Courtenay Central cinema, during June 2019, we opened a three
screen,
440
seat
pop-up theater, in Lower Hutt, in a suburb of Wellington, New Zealand.
Non-Segment General & Administrative Expenses
Non-segment general and administrative expense for the quarter ended
June 30, 2019
decreased
by
18%
, or
$1.1
million, to
$4.7
million compared to the same period in the prior year, related to lower legal expenses incurred.
For the six months ended June 30, 2019, the decrease was also
18%
, or
$2.2
million, to
$9.7
million compared to the six months ended June 30, 2018, related to lower legal expenses incurred
.
Income Tax Expense
Income tax expense for the quarter and six months ended
June 30, 2019
,
decreased by
$0.3
million
and
$2.5
million
, respectively,
compared to the equivalent prior-year period. The change between 2019 and 2018 is primarily related to lower pretax income in the first half of 2019.
Business Segment Results
At
June 30, 2019
, we leased or owned
and operated
60
cinemas with
483
screens,
which includes our
interests in certain unconsolidated joint ventures that
own
3
(three)
cinemas with 29 screens. In the
first
quarter of 2019, we acquired a
proven 4
-
screen cinema in
Devonport,
Tasmania, Australia
. During June 2019,
we opened a
three screen cinema trading as
T
he Hutt Pop Up by Reading Cinemas in Lower Hutt
,
a suburb of
Wellington, New Zealand
,
thereby
increasing our
leased and owned
cinema count
by two for the 2019 year
and our
screen count to 483. We also (i)
owned and operated
5 (
five
)
ETCs located in Newmarket (a suburb of Brisbane), Belmont (a suburb of Perth), Auburn (a suburb of Sydney) and
in
Townsville
in Australia and Wellington in New Zealand, (ii) owned and operated our headquarters office buildings in Culver City (an emerging high-tech and communications hub in Los Angeles County) and Melbourne, Australia, (iii) owned and operated the fee interests in three developed commercial properties in Manhattan and Chicago improved with live theatr
e
s comprising
6 (
six
)
stages and ancillary retail and commercial space (our fourth live theatre was closed at the end of 2015 as part of the
redevelopment of 44
Union Square
in New York City
), (iv) owned a 75% managing member interest in a limited liability company
,
which in turn owns the fee interest in Cinemas 1,2,3, (v) held for development approximately 70.4 acres of developable industrial land located next to the Auckland Airport in New Zealand, (vi) owned a 50% managing member interest in a limited liability company, which in turn owns a 202-acre property in Coachella, California that is zoned approximately 150 acres for single-family residential use (maximum 550 homes) and approximately 50 acres for high density mixed use in the U.S., that is held for development, and, (vii) owned 197 acres principally in Pennsylvania from our legacy railroad business, including the Reading Viaduct in downtown Philadelphia.
The Company transacts business in Australia and New Zealand and is subject to risks associated with changing foreign currency exchange rates
. The Australian and New Zealand dollars based on the spot rate weakened versus prior quarter against the U.S. dollar slightly negatively impacting the value of our assets and liabilities.
The average rate for the
six
mo
nths ended
June 30, 2019
and
2018
has also weakened by
8.5%
and
6.1%
respectively. This has decreased
the
value of our Australian and New Zealand revenues and expenses.
Refer to Note 3 – Operations in Foreign Currency
for further information
.
Cinema Exhibition
The following table details our cinema exhibition segment operating results for the quarter and six months ended
June 30, 2019
and
June 30, 2018
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change
|
|
|
|
Quarter Ended
|
|
Six Months Ended
|
|
Fav/(Unfav)
|
(Dollars in thousands)
|
June 30,
2019
|
% of Revenue
|
June 30,
2018
|
% of Revenue
|
|
June 30,
2019
|
% of Revenue
|
June 30,
2018
|
% of Revenue
|
|
Quarter
Ended
|
Six
Months
Ended
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
Admissions revenue
|
$
|
24,722
|
34%
|
$
|
28,137
|
35%
|
|
$
|
44,633
|
34%
|
$
|
52,843
|
35%
|
|
(12)
|
%
|
(16)
|
%
|
|
|
Food & beverage revenue
|
|
13,123
|
19%
|
|
13,605
|
17%
|
|
|
22,699
|
18%
|
|
24,370
|
16%
|
|
(4)
|
%
|
(7)
|
%
|
|
|
Advertising and other revenue
|
|
3,116
|
4%
|
|
2,671
|
3%
|
|
|
5,661
|
4%
|
|
5,187
|
3%
|
|
17
|
%
|
9
|
%
|
|
|
|
$
|
40,961
|
57%
|
$
|
44,413
|
55%
|
|
$
|
72,993
|
56%
|
$
|
82,400
|
54%
|
|
(8)
|
%
|
(11)
|
%
|
|
Australia
|
Admissions revenue
|
$
|
16,579
|
23%
|
$
|
17,179
|
21%
|
|
$
|
30,615
|
23%
|
$
|
34,230
|
22%
|
|
(3)
|
%
|
(11)
|
%
|
|
|
Food & beverage revenue
|
|
7,407
|
10%
|
|
8,171
|
10%
|
|
|
13,468
|
10%
|
|
16,008
|
11%
|
|
(9)
|
%
|
(16)
|
%
|
|
|
Advertising and other revenue
|
|
1,613
|
2%
|
|
1,787
|
2%
|
|
|
2,956
|
3%
|
|
3,616
|
2%
|
|
(10)
|
%
|
(18)
|
%
|
|
|
|
$
|
25,599
|
35%
|
$
|
27,137
|
34%
|
|
$
|
47,039
|
36%
|
$
|
53,854
|
35%
|
|
(6)
|
%
|
(13)
|
%
|
|
New Zealand
|
Admissions revenue
|
$
|
3,881
|
5%
|
$
|
5,575
|
7%
|
|
$
|
6,873
|
5%
|
$
|
10,509
|
7%
|
|
(30)
|
%
|
(35)
|
%
|
|
|
Food & beverage revenue
|
|
1,621
|
3%
|
|
2,532
|
3%
|
|
|
2,930
|
3%
|
|
4,798
|
3%
|
|
(36)
|
%
|
(39)
|
%
|
|
|
Advertising and other revenue
|
|
321
|
0%
|
|
526
|
1%
|
|
|
533
|
0%
|
|
877
|
1%
|
|
(39)
|
%
|
(39)
|
%
|
|
|
|
$
|
5,823
|
8%
|
$
|
8,633
|
11%
|
|
$
|
10,336
|
8%
|
$
|
16,184
|
11%
|
|
(33)
|
%
|
(36)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
$
|
72,383
|
100%
|
$
|
80,183
|
100%
|
|
$
|
130,368
|
100%
|
$
|
152,438
|
100%
|
|
(10)
|
%
|
(14)
|
%
|
OPERATING EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
Film rent and advertising cost
|
$
|
(13,650)
|
19%
|
$
|
(15,556)
|
19%
|
|
$
|
(23,773)
|
18%
|
$
|
(28,431)
|
19%
|
|
12
|
%
|
16
|
%
|
|
|
Food & beverage cost
|
|
(2,988)
|
4%
|
|
(2,920)
|
4%
|
|
|
(5,310)
|
4%
|
|
(5,222)
|
3%
|
|
(2)
|
%
|
(2)
|
%
|
|
|
Occupancy expense
|
|
(6,886)
|
10%
|
|
(7,382)
|
9%
|
|
|
(13,831)
|
11%
|
|
(14,584)
|
10%
|
|
7
|
%
|
5
|
%
|
|
|
Other operating expense
|
|
(11,389)
|
16%
|
|
(10,677)
|
13%
|
|
|
(21,563)
|
17%
|
|
(20,619)
|
14%
|
|
(7)
|
%
|
(5)
|
%
|
|
|
|
$
|
(34,913)
|
49%
|
$
|
(36,535)
|
46%
|
|
$
|
(64,477)
|
50%
|
$
|
(68,856)
|
45%
|
|
4
|
%
|
6
|
%
|
|
Australia
|
Film rent and advertising cost
|
$
|
(8,029)
|
11%
|
$
|
(8,292)
|
10%
|
|
$
|
(14,307)
|
11%
|
$
|
(15,990)
|
10%
|
|
3
|
%
|
11
|
%
|
|
|
Food & beverage cost
|
|
(1,406)
|
2%
|
|
(1,604)
|
2%
|
|
|
(2,521)
|
2%
|
|
(3,198)
|
2%
|
|
12
|
%
|
21
|
%
|
|
|
Occupancy expense
|
|
(3,971)
|
5%
|
|
(4,130)
|
5%
|
|
|
(7,934)
|
6%
|
|
(8,382)
|
5%
|
|
4
|
%
|
5
|
%
|
|
|
Other operating expense
|
|
(5,366)
|
7%
|
|
(5,592)
|
7%
|
|
|
(10,781)
|
8%
|
|
(11,346)
|
7%
|
|
4
|
%
|
5
|
%
|
|
|
|
$
|
(18,772)
|
25%
|
$
|
(19,618)
|
24%
|
|
$
|
(35,543)
|
27%
|
$
|
(38,916)
|
26%
|
|
4
|
%
|
9
|
%
|
|
New Zealand
|
Film rent and advertising cost
|
$
|
(1,894)
|
3%
|
$
|
(2,707)
|
3%
|
|
$
|
(3,231)
|
3%
|
$
|
(4,938)
|
3%
|
|
30
|
%
|
35
|
%
|
|
|
Food & beverage cost
|
|
(326)
|
0%
|
|
(574)
|
1%
|
|
|
(618)
|
0%
|
|
(1,065)
|
1%
|
|
43
|
%
|
42
|
%
|
|
|
Occupancy expense
|
|
(907)
|
1%
|
|
(1,359)
|
2%
|
|
|
(1,711)
|
1%
|
|
(2,703)
|
2%
|
|
33
|
%
|
37
|
%
|
|
|
Other operating expense
|
|
(1,274)
|
2%
|
|
(1,859)
|
2%
|
|
|
(2,699)
|
2%
|
|
(3,513)
|
2%
|
|
31
|
%
|
23
|
%
|
|
|
|
$
|
(4,401)
|
6%
|
$
|
(6,499)
|
8%
|
|
$
|
(8,259)
|
6%
|
$
|
(12,219)
|
8%
|
|
32
|
%
|
32
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense
|
$
|
(58,086)
|
80%
|
$
|
(62,652)
|
78%
|
|
$
|
(108,279)
|
83%
|
$
|
(119,991)
|
79%
|
|
7
|
%
|
10
|
%
|
DEPRECIATION, AMORTIZATION, GENERAL AND ADMINISTRATIVE EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
Depreciation and amortization
|
$
|
(2,516)
|
3%
|
$
|
(2,481)
|
3%
|
|
$
|
(5,142)
|
4%
|
$
|
(4,602)
|
3%
|
|
(1)
|
%
|
(12)
|
%
|
|
|
General and administrative expense
|
|
(432)
|
1%
|
|
(699)
|
1%
|
|
|
(1,036)
|
1%
|
|
(1,243)
|
1%
|
|
38
|
%
|
17
|
%
|
|
|
|
$
|
(2,948)
|
4%
|
$
|
(3,180)
|
4%
|
|
$
|
(6,178)
|
5%
|
$
|
(5,845)
|
4%
|
|
7
|
%
|
(6)
|
%
|
|
Australia
|
Depreciation and amortization
|
$
|
(1,222)
|
2%
|
$
|
(1,181)
|
1%
|
|
$
|
(2,403)
|
2%
|
$
|
(2,384)
|
2%
|
|
(3)
|
%
|
(1)
|
%
|
|
|
General and administrative expense
|
|
(467)
|
1%
|
|
(290)
|
0%
|
|
|
(854)
|
1%
|
|
(589)
|
0%
|
|
(61)
|
%
|
(45)
|
%
|
|
|
|
$
|
(1,689)
|
3%
|
$
|
(1,471)
|
2%
|
|
$
|
(3,257)
|
3%
|
$
|
(2,973)
|
2%
|
|
(15)
|
%
|
(10)
|
%
|
|
New Zealand
|
Depreciation and amortization
|
$
|
(352)
|
1%
|
$
|
(420)
|
1%
|
|
$
|
(703)
|
1%
|
$
|
(861)
|
1%
|
|
16
|
%
|
18
|
%
|
|
|
General and administrative expense
|
|
(39)
|
0%
|
|
34
|
0%
|
|
|
(39)
|
0%
|
|
11
|
(0)%
|
|
(>100)
|
%
|
(>100)
|
%
|
|
|
|
$
|
(391)
|
1%
|
$
|
(386)
|
0%
|
|
$
|
(742)
|
1%
|
$
|
(850)
|
1%
|
|
(1)
|
%
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation, amortization, general and administrative expense
|
$
|
(5,028)
|
8%
|
$
|
(5,037)
|
6%
|
|
$
|
(10,177)
|
9%
|
$
|
(9,668)
|
6%
|
|
-
|
%
|
(5)
|
%
|
OPERATING INCOME – CINEMA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
$
|
3,100
|
4%
|
$
|
4,698
|
6%
|
|
$
|
2,338
|
2%
|
$
|
7,699
|
5%
|
|
(34)
|
%
|
(70)
|
%
|
|
Australia
|
|
5,138
|
7%
|
|
6,048
|
8%
|
|
|
8,239
|
6%
|
|
11,965
|
8%
|
|
(15)
|
%
|
(31)
|
%
|
|
New Zealand
|
|
1,031
|
1%
|
|
1,748
|
2%
|
|
|
1,335
|
1%
|
|
3,115
|
2%
|
|
(41)
|
%
|
(57)
|
%
|
|
Total Cinema operating income
|
$
|
9,269
|
12%
|
$
|
12,494
|
16%
|
|
$
|
11,912
|
9%
|
$
|
22,779
|
15%
|
|
(26)
|
%
|
(48)
|
%
|
2
nd
Quarter Results
Cinema
Segment operating income
C
inema
segment
operating income
decreased
by
26%
,
or
$3.2
million, to
$9.3
million for the quarter ended
June 30, 2019
compared to
June 30, 2018
, primarily driven by decreased operating income in the U.S., Australia, and New Zealand, which was due to a decrease in attendance,
the continued temporary closure of our Courtenay Central Cinema in Wellington, New Zealand
and fluctuations in average ticket price (“ATP”), and spend per patron (“SPP”) as outlined below.
Revenue
Cinema
revenue decreased by
10%
, or
$7.8
million, to
$72.4
million for the
quarter
ended June 30, 2019 compared to June 30, 2018, primarily attributable to a weakening foreign currency exchange rate, and a decrease in attendance in all three circuits.
Below are the changes in our cinema revenue by market:
|
·
|
|
U.S. cinema revenue
decreased
by
8%
, or
$3.5
million, to
$41.0
million for the second quarter due to a 13% decrease in attendance; offset by a 9% increase in SPP, while ATP remained flat.
|
|
·
|
|
Australia cinema revenue
decreased
by
6%
, or
$1.5
million
, to
$25.6
million for the second quarter, primarily due to a 5% decrease in attendance and SPP, offset by a 2% increase in ATP.
|
|
·
|
|
New Zealand cinema revenue
decreased
by
33%
, or
$2.8
million, to
$5.8
million for the second quarter due to a decrease of 34% in attendance (significantly due to the temporary closure of our Courtenay Central Cinema), offset by a 5% increase in ATP, while SPP remained relatively flat.
|
Operating expense
Operating expense
for the
second
quarter ended
June 30, 2019
decreased
by
7%
, or
$4.6
million, to
$58.1
million compared to the same quarter in 2018
primarily attributable to (i) lower film rent expense
driven by
lower admissions revenue, and (ii) lower F&B costs due to lower F&B r
evenue primarily in New Zealand (significantly due to the temporary closure of the Courtenay Central Cinema).
Operating expense as a percentage of gross revenue has increased to
80%
for the second quarter of
2019
,
compared to
78%
for
the same period in 2018, due to the lower than anticipated revenue in our box office and the fact that our occupancy costs are generally fixed, and cannot be adjusted to reflect such lower admission levels.
Depreciation, amortization, general and administrative expense
Depreciation, amortization, general and administrative expense for the quarter ended June 30, 2019,
remained flat at $5.0 million c
ompared to the second quarter 2018.
Six Month Results
Cinema Segment operating income
C
inema
segment
operating income
decreased
by
48%
, or
$10.9
million, to
$11.9
million for the
six
months ended
June 30, 2019
compared to the six months ended
June 30, 2018
, primarily driven by decreased operating income in all three circuits, which was due to a softer film slate worldwide resulting in decreases in attendance worldwide. Additionally, Courtenay Central Cinema in Wellington, New Zealand was temporarily closed in January 2019 due to seismic concerns.
According to industry sources, the U.S. exhibition industry admissions for the
six
months ended
June 30, 2019
were down 10%, declining from $5.4 billion to $4.9 billion. Australia and New Zealand Box Office saw similar declines.
Revenue
Cinema revenue
decreased
by
14%
, or
$22.1
million, to
$130.4
million for the six
months
ended June 30, 2019 compared to June 30, 2018,
primarily driven by decreased attendance worldwide, and fluctuations in average ticket price (“ATP”), and spend per patron (“SPP”) as outlined below
:
|
·
|
|
U.S. cinema revenue
decreased
by
11%
, or
$9.4
million, to
$73.0
million, due to a 17% decrease in attendance, offset by a 10% increase in SPP, and a 2% increase in ATP.
|
|
·
|
|
Australia cine
ma revenue
decreased
by
13%
, or
$6.8
million, to
$47.0
million, primarily due to a 10% decrease in attendance, a 7% decrease in SPP, while ATP remained relatively flat.
|
|
·
|
|
New Zealand cinema revenue decreased by
36%
, or
$5.8
million, to
$10.3
million, as a result of a 36% decrease in attendance
(significantly due to the temporary closure of our Courtenay Central Cinema); offset
by a 3% increase in ATP, while SPP remained flat.
|
Operating expense
Operating expense
for the
six
months ended
June 30, 2019
decreased
by
10%
, or
$11.7
million, to
$108.3
millio
n, primarily attributable to (i) lower film rent due
to lower admissions revenue, (ii) lower F&B costs due to lower F&B revenue,
and (iii) lower occupancy costs due to
the temporary closure of Courtenay Central Cinema and
the foreign currency movements
.
Operating expense as a percentage of gross revenue has increase
d
to
83%
for the
six
months ended June 30, 2019, compared to
79% in
the same period for 2018.
Depreciation, amortization, general and administrative expense
Depreciation, amortization, general and administrative expense for th
e
six
months ended
June 30, 2019
increased
by
5%
, or
$0.5
million, to
$10.2
million,
compared to the same period in 201
8
. This expense remained relatively flat as the number of cinemas open or assets placed in service have resulted in higher depreciation costs, offset by the foreign exchange movements in Australia and New Zealand.
Real Estate
The following table details our real estate segment operating results for the quarter and six months ended
June 30, 2019
and
2018
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Six Months Ended
|
|
Fav/(Unfav)
|
(Dollars in thousands)
|
June 30,
2019
|
% of
Revenue
|
June 30,
2018
|
% of
Revenue
|
|
June 30,
2019
|
% of
Revenue
|
June 30,
2018
|
% of
Revenue
|
|
Quarter Ended
|
Six
Months
Ended
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
Live theater rental and ancillary income
|
$
|
831
|
15%
|
$
|
903
|
14%
|
|
$
|
1,767
|
16%
|
$
|
1,501
|
12%
|
|
(8)
|
%
|
18
|
%
|
|
|
Property rental income
|
|
49
|
1%
|
|
49
|
1%
|
|
|
101
|
1%
|
|
104
|
1%
|
|
-
|
%
|
(3)
|
%
|
|
|
|
|
880
|
16%
|
|
952
|
15%
|
|
|
1,868
|
17%
|
|
1,605
|
13%
|
|
(8)
|
%
|
16
|
%
|
|
Australia
|
Property rental income
|
|
4,052
|
73%
|
|
4,302
|
67%
|
|
|
7,967
|
72%
|
|
8,456
|
68%
|
|
(6)
|
%
|
(6)
|
%
|
|
New Zealand
|
Property rental income
|
|
632
|
11%
|
|
1,171
|
18%
|
|
|
1,159
|
11%
|
|
2,371
|
19%
|
|
(46)
|
%
|
(51)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
5,564
|
100%
|
$
|
6,425
|
100%
|
|
$
|
10,994
|
100%
|
$
|
12,432
|
100%
|
|
(13)
|
%
|
(12)
|
%
|
OPERATING EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
Live theater cost
|
$
|
(297)
|
5%
|
$
|
(330)
|
5%
|
|
$
|
(596)
|
5%
|
$
|
(625)
|
5%
|
|
10
|
%
|
5
|
%
|
|
|
Property cost
|
|
(156)
|
3%
|
|
(141)
|
2%
|
|
|
(314)
|
3%
|
|
(276)
|
2%
|
|
(11)
|
%
|
(14)
|
%
|
|
|
Occupancy expense
|
|
(128)
|
2%
|
|
(197)
|
3%
|
|
|
(278)
|
3%
|
|
(359)
|
3%
|
|
35
|
%
|
23
|
%
|
|
|
|
|
(581)
|
10%
|
|
(668)
|
10%
|
|
|
(1,188)
|
11%
|
|
(1,260)
|
10%
|
|
13
|
%
|
6
|
%
|
|
Australia
|
Property cost
|
|
(787)
|
14%
|
|
(752)
|
12%
|
|
|
(1,488)
|
14%
|
|
(1,504)
|
12%
|
|
(5)
|
%
|
1
|
%
|
|
|
Occupancy expense
|
|
(664)
|
12%
|
|
(670)
|
10%
|
|
|
(1,356)
|
12%
|
|
(1,237)
|
10%
|
|
1
|
%
|
(10)
|
%
|
|
|
|
|
(1,451)
|
26%
|
|
(1,422)
|
22%
|
|
|
(2,844)
|
26%
|
|
(2,741)
|
22%
|
|
(2)
|
%
|
(4)
|
%
|
|
New Zealand
|
Property cost
|
|
(268)
|
5%
|
|
(317)
|
5%
|
|
|
(566)
|
5%
|
|
(638)
|
5%
|
|
15
|
%
|
11
|
%
|
|
|
Occupancy expense
|
|
(138)
|
2%
|
|
(144)
|
2%
|
|
|
(285)
|
3%
|
|
(296)
|
2%
|
|
4
|
%
|
4
|
%
|
|
|
|
|
(406)
|
7%
|
|
(461)
|
7%
|
|
|
(851)
|
8%
|
|
(934)
|
8%
|
|
12
|
%
|
9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense
|
|
$
|
(2,438)
|
44%
|
$
|
(2,551)
|
40%
|
|
$
|
(4,883)
|
44%
|
$
|
(4,935)
|
40%
|
|
4
|
%
|
1
|
%
|
DEPRECIATION, AMORTIZATION, GENERAL AND ADMINISTRATIVE EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
Depreciation and amortization
|
$
|
(194)
|
3%
|
$
|
(193)
|
3%
|
|
$
|
(390)
|
4%
|
$
|
(385)
|
3%
|
|
(1)
|
%
|
(1)
|
%
|
|
|
General and administrative expense
|
|
(178)
|
4%
|
|
(157)
|
2%
|
|
|
(337)
|
3%
|
|
(320)
|
3%
|
|
(13)
|
%
|
(5)
|
%
|
|
|
|
|
(372)
|
7%
|
|
(350)
|
5%
|
|
|
(727)
|
7%
|
|
(705)
|
6%
|
|
(6)
|
%
|
(3)
|
%
|
|
Australia
|
Depreciation and amortization
|
$
|
(911)
|
17%
|
$
|
(984)
|
15%
|
|
$
|
(1,837)
|
17%
|
$
|
(1,893)
|
15%
|
|
7
|
%
|
3
|
%
|
|
|
General and administrative expense
|
|
(248)
|
4%
|
|
(323)
|
5%
|
|
|
(540)
|
5%
|
|
(734)
|
6%
|
|
23
|
%
|
26
|
%
|
|
|
|
|
(1,159)
|
21%
|
|
(1,307)
|
20%
|
|
|
(2,377)
|
22%
|
|
(2,627)
|
21%
|
|
11
|
%
|
10
|
%
|
|
New Zealand
|
Depreciation and amortization
|
|
(249)
|
4%
|
|
(263)
|
4%
|
|
|
(504)
|
5%
|
|
(531)
|
4%
|
|
5
|
%
|
5
|
%
|
|
|
General and administrative expense
|
|
(1)
|
0%
|
|
—
|
0%
|
|
|
(1)
|
0%
|
|
—
|
0%
|
|
-
|
%
|
-
|
%
|
|
|
|
|
(250)
|
4%
|
|
(263)
|
4%
|
|
|
(505)
|
5%
|
|
(531)
|
4%
|
|
5
|
%
|
5
|
%
|
|
Total depreciation, amortization, general and administrative expense
|
$
|
(1,781)
|
32%
|
$
|
(1,920)
|
30%
|
|
$
|
(3,609)
|
34%
|
$
|
(3,863)
|
31%
|
|
7
|
%
|
7
|
%
|
OPERATING INCOME - REAL ESTATE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
$
|
(73)
|
(1)%
|
$
|
(66)
|
(1)%
|
|
$
|
(47)
|
(0)%
|
$
|
(360)
|
(3)%
|
|
(11)
|
%
|
87
|
%
|
|
Australia
|
|
1,442
|
25%
|
|
1,573
|
24%
|
|
|
2,746
|
25%
|
|
3,088
|
25%
|
|
(8)
|
%
|
(11)
|
%
|
|
New Zealand
|
|
(24)
|
0%
|
|
447
|
7%
|
|
|
(197)
|
(2)%
|
|
906
|
7%
|
|
(>100)
|
%
|
(>100)
|
%
|
|
Total real estate operating income
|
$
|
1,345
|
24%
|
$
|
1,954
|
30%
|
|
$
|
2,502
|
23%
|
$
|
3,634
|
29%
|
|
(31)
|
%
|
(31)
|
%
|
2
nd
Quarter Results
Real Estate
Segment income
Real estate
segment
operating income
decreased
by
31%
, or
$0.6
million, to
$1.3
million for the quarter ended
June 30, 2019
compared to
June 30, 2018
, primarily due to
the New Zealand operations, specifically the
ongoing
closure of most of the net rentable area of Courtenay Central
.
Revenue
Real estate revenue
for the second quarter
2019
decreased
by
13%
, or
$0.9
million, to
$5.6
million compared to the second quarter of 2018
primarily
due to
a
decrease in revenues from our New Zealand segment related to the closure of portions of Courtenay Central.
Operating expense
Operating expense
for the quarter
ended
June 30, 2019
decreased
by
4%
, or
$0.1
million, to
$2.4
million, compared to the second quarter
ended
June 30, 2018
Depreciation
,
amortization
, general and administrative expense
Depreciation, amortization, general and administrative expense for the quarter ended
June 30, 2019
decreased
7%
, or
$0.1
million, to
$1.8
million compared to the second quarter ended
June 30, 2018
Six Month Results
Real Estate Segment income
Real estate
segment
operating income
decreased
by
31%
, or
$1.1
million, to
$2.5
million for the six
months ended June 30, 2019,
compared to the same period in 2018
,
primarily attributable to an operating loss in the New Zealand circuit of
$0.2
million for 2019, compared to an operating gain of $1.0 million for the six months ended June 30, 2018
. Real estate segment income has declined predominantly due to Courtenay Central’s partial closure.
Revenue
Real estate revenue
for the
six
months ended
June 30, 2019
decreased
by
12%
, or
$1.4
million, to
$11.0
milli
on
, mainly driven by
the partial
closure
of
the Courtenay Central ETC in 2019, which was open for the entire year in 2018,
and the
unfavorable impact of foreign currency movements
in both Australia and New Zealand
.
Operating expense
Operating expense
for the six months ended June 30, 2019
decreased
by
1%
, or
$0.1
million, to
$4.9
million.
Depreciation, amortization, general and administrative expense
Depreciation, amortization, general and administrative expense for the six months ended June 30, 2019
decreased
by
7%
, or
$0.3
million, to
$3.6
million, primarily driven by the foreign currency movements.
LIQUIDITY AND CAPITAL RESOURCES
Our cinema exhibition business plan is to enhance our current cinemas where it is financially reasonable to do so; develop our specialty cinemas in select markets; expand our food and beverage offering, and continue, on an opportunistic basis, to identify, develop, and acquire cinema properties at reasonable prices that allow us to leverage our cinema expertise over a larger operating base.
Our real estate business plan is to complete the redevelopment of 44 Union Square in New York City; to reassess and master-plan the Cinemas 1,2,3 property for redevelopment as a stand-alone 96,000 square foot mixed use property and in the interim to continue to use it as a cinema; to continue the build-out of our Newmarket Village and Auburn ETCs and the master planning of the expansion of our Townsville ETC in Australia
; to master plan and consider the redevelopment of our Courtenay Central site in New Zealand into an urban entertainment center with a focus on cinema exhibition, food and beverage, and grocery store uses; and in Manukau, New Zealand, to develop in concert with other major land owners, of plans
for the development and funding of the infrastructure needed to support the construction of income-producing improvements; and to continue to be sensitive to opportunities to convert our entertainment assets to higher and better uses, or, where appropriate, to dispose of such assets. We will also continue to explore potential synergistic acquisitions that may not readily fall into either our cinema or real estate segment.
The success of our Company is dependent on our ability to execute these business plans effectively through our available resources (both cash and available borrowing facilities) while still timely and effectively managing our liquidity in order to meet our financial obligations when they come due. At the present, our financial obligations arise mainly from capital expenditure needs, working capital requirements, and debt servicing requirements. We manage the liquidity risk by ensuring our ability to generate sufficient cash flows from operating activities and to obtain adequate, reasonable financing or extension of maturity dates under reasonable arrangements, and/or if needed to convert non-performing or non-strategic assets into cash.
At
June 30, 2019
, our consolidated cash and cash equivalents totaled
$8.5
million. Of this amount,
$1.9
million and
$1.0
million were held by our Australian and New Zealand subsidiaries, respectively. Our intention is to indefinitely reinvest Australian earnings locally, but not indefinitely reinvest New Zealand earnings. If the Australian earnings were used to fund U.S. operations, they would be subject to additional state income taxes upon repatriation.
The change
s
in cash and cash equivalents
for the six months ended June 30, 2019 and 2018 are discussed
as follows
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
June 30,
|
|
|
|
(Dollars in thousands)
|
|
2019
|
|
2018
|
|
% Change
|
Net cash provided by (used in) operating activities
|
|
$
|
3,058
|
|
$
|
13,330
|
|
(77)
|
%
|
Net cash provided by (used in) investing activities
|
|
|
(23,965)
|
|
|
(42,975)
|
|
44
|
%
|
Net cash provided by (used in) financing activities
|
|
|
16,485
|
|
|
29,222
|
|
(44)
|
%
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(189)
|
|
|
(503)
|
|
62
|
%
|
Increase (decrease) in cash and cash equivalents
|
|
$
|
(4,611)
|
|
$
|
(926)
|
|
(>100)
|
%
|
Operating activities
Cash provided by operating activities for the first
six
months of
2019
decreased
by
$10.3
million, to $
3.1
million primarily driven by $
5.5
million lower cash inflows from operating activities as well as a $
4.8
million decrease in net operating assets.
Investing activities
Cash used in investing activities during the six months ended
June 30, 2019
decreased
by
$19.0
million compared to the same period in
2018
,
to net cash used of
$24.0
million, primarily
due to a decrease in our cinema refurbishment activities compared to the first six months of 2018, and the substantial completion of the upgrading and expansion of our Newmarket and Auburn/Redyard ETCs in 2018
. It is anticipated that spending on our cinema activities will pick up over the remainder of the year.
Financing Activities
The
$16.5
million net cash provided by financing activities during the
six
months ended
June 30, 2019
was
primarily related to
$34.7
million of new borrowings, of
fset by
$14.9
million of loan repayments.
Proceeds from these new borrowings related principally to the ongoing construction of our 44 Union Square
project
in Manhattan and to fund the capital improvements in our cinemas and real estate segments.
Additionally
, $2.6 million was used as
part of our Stock Repurchase Program.
On March 2, 2017, the Board of Directors authorized a stock repurchase program to repurchase up to $25.0 million of Reading’s Class A
Non-Voting
Common Stock. The Board on March 14, 2019, extended that program to March 2, 2021.
At June 30, 2019, there was
$13.5
million of capacity remaining in that authorization
.
During the six months ended June 30, 2019 we have spent $2.6 million on repurchasing 196,955 shares of Class A Non-Voting Common Stock.
We manage our cash, investments and capital structure so we are able to meet the short-term and long-term obligations of our business, while maintaining financial flexibility and liquidity. We forecast, analyze and monitor our cash flows to enable investment and financing within the overall constraints of our financial strategy. In recent years, our treasury management has been focused on more aggressive cash management using cash balances to reduce debt. In earlier years, we maintained significant cash balances in our bank accounts. We have used cash generated from operations and other excess cash, to the extent not needed for any capital expenditures, to pay down our loans and credit facilities providing us some flexibility on our available loan facilities for future use and thereby, reducing interest charges.
The table below presents the changes in our total available resources (cash and borrowings), debt-to-equity ratio, working capital and other relevant information addressing our liquidity for the
six
months ended
June 30, 2019
and preceding four years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and
for the
6-Months
Ended
|
|
Year Ended December 31
|
($ in thousands)
|
|
June 30, 2019
|
|
2018
|
|
2017
|
|
2016
|
|
2015
(2)
|
Total Resources (cash and borrowings)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents (unrestricted)
|
|
$
|
8,516
|
|
$
|
13,127
|
|
$
|
13,668
|
|
$
|
19,017
|
|
$
|
19,702
|
Unused borrowing facility
|
|
|
101,957
|
|
|
85,886
|
|
|
137,231
|
|
|
117,599
|
|
|
70,134
|
Restricted for capital projects
(1)
|
|
|
18,945
|
|
|
30,318
|
|
|
62,280
|
|
|
62,024
|
|
|
10,263
|
Unrestricted capacity
|
|
|
83,012
|
|
|
55,568
|
|
|
74,951
|
|
|
55,575
|
|
|
59,871
|
Total resources at period end
|
|
|
110,473
|
|
|
99,013
|
|
|
150,899
|
|
|
136,616
|
|
|
89,836
|
Total unrestricted resources at period end
|
|
|
91,528
|
|
|
68,695
|
|
|
88,619
|
|
|
74,592
|
|
|
79,573
|
Debt-to-Equity Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual facility
|
|
$
|
288,594
|
|
$
|
252,929
|
|
$
|
271,732
|
|
$
|
266,134
|
|
$
|
207,075
|
Total debt (gross of deferred financing costs)
|
|
|
186,926
|
|
|
167,043
|
|
|
134,501
|
|
|
148,535
|
|
|
130,941
|
Current
|
|
|
40,576
|
|
|
30,393
|
|
|
8,109
|
|
|
567
|
|
|
15,000
|
Non-current
|
|
|
146,061
|
|
|
136,650
|
|
|
126,392
|
|
|
147,968
|
|
|
115,941
|
Finance lease liabilities
|
|
|
289
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
Total book equity
|
|
|
177,697
|
|
|
180,547
|
|
|
181,618
|
|
|
146,890
|
|
|
138,951
|
Debt-to-equity ratio
|
|
|
1.05
|
|
|
0.93
|
|
|
0.74
|
|
|
1.01
|
|
|
0.94
|
Changes in Working Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital (deficit)
(3)
|
|
$
|
(80,376)
|
|
$
|
(55,270)
|
|
$
|
(46,971)
|
|
$
|
6,655
|
|
$
|
(35,581)
|
Current ratio
|
|
|
0.26
|
|
|
0.35
|
|
|
0.42
|
|
|
1.10
|
|
|
0.51
|
Capital Expenditures (including acquisitions)
|
|
$
|
24,607
|
|
$
|
56,827
|
|
$
|
76,708
|
|
$
|
49,166
|
|
$
|
53,119
|
|
(1)
|
|
This relates to the construction facilities specifically negotiated for: (i) 44 Union Square redevelopment project, obtained in December 2016, and (ii) New Zealand construction projects, obtained in May 2015. The New Zealand construction loan expired December 31, 2018.
|
|
(2)
|
|
Certain 2015 balances included the restatement impact as a result of a change in accounting principle (
see Note 2 – Summary of Significant Accounting Policies – Accounting Changes
). Certain 2017 and 2016 balances included the restatement impact as a result of a prior period financial statement correction of immaterial errors (see Note 2 – Summary of Significant Accounting Policies – Prior Period Financial Statement Correction of Immaterial Errors).
|
|
(3)
|
|
Typically our working capital (deficit) is negative as we receive revenue from our cinema business ahead of the time that we have to pay our associated liabilities. We use the money we receive to pay down our borrowings in the first instance
|
C
ONTRACTUAL OBLIGATIONS, COMMITMENTS
AND
CONTINGENCIES
The following table provides information with respect to the maturities and scheduled principal repayments of our recorded contractual obligations and certain of our commitments and contingencies, either recorded or off-balance sheet, as of
June 30, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
Thereafter
|
|
Total
|
Debt
(1)
|
|
$
|
40,399
|
|
$
|
46,740
|
|
$
|
258
|
|
$
|
270
|
|
$
|
62,853
|
|
$
|
8,204
|
|
$
|
158,724
|
Operating leases, including imputed interest
|
|
|
15,564
|
|
|
31,070
|
|
|
31,391
|
|
|
31,382
|
|
|
30,483
|
|
|
174,937
|
|
|
314,827
|
Finance leases, including imputed interest
|
|
|
87
|
|
|
101
|
|
|
53
|
|
|
43
|
|
|
28
|
|
|
—
|
|
|
312
|
Subordinated debt
(1)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
27,913
|
|
|
27,913
|
Pension liability
|
|
|
342
|
|
|
684
|
|
|
684
|
|
|
684
|
|
|
684
|
|
|
2,277
|
|
|
5,355
|
Village East purchase option
(3)
|
|
|
5,900
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,900
|
Estimated interest on debt
(2)
|
|
|
5,174
|
|
|
6,394
|
|
|
4,968
|
|
|
4,968
|
|
|
4,946
|
|
|
7,408
|
|
|
33,858
|
Total
|
|
$
|
67,466
|
|
$
|
84,989
|
|
$
|
37,354
|
|
$
|
37,347
|
|
$
|
98,994
|
|
$
|
220,739
|
|
$
|
546,889
|
|
(1)
|
|
Information is presented gross of deferred financing costs.
|
|
(2)
|
|
Estimated interest on debt is based on the anticipated loan balances for future periods and current applicable interest rates.
|
|
(3)
|
|
Represents the lease liability of the option associated with the ground lease purchase of the Village East Cinema
.
|
Refer to
Note 13 – Commitments and Contingencies
for additional information.
Litigation
We are currently involved in certain legal proceedings and, as required, have accrued estimates of probable and estimable losses for the resolution of these claims.
Where we are the plaintiffs, we expense all legal fees on an on-going basis and make no provision for any potential settlement amounts until received. In Australia, the prevailing party is usually entitled to recover its attorneys’ fees, which typically work out to be approximately 60% of the amounts actually spent where first class legal counsel is engaged at customary rates. Where we are a plaintiff, we have likewise made no provision for the liability for the defendant’s attorneys' fees in the event we are determined not to be the prevailing party.
Where we are the defendants, we accrue for probable damages that insurance may not cover as they become known and can be reasonably estimated. In our opinion, any claims and litigation in which we are currently involved are not reasonably likely to have a material adverse effect on our business, results of operations, financial position, or liquidity. I
t is possible, however, that future results of the operations for any particular quarterly or annual period could be materially affected by the ultimate outcome of the legal proceedings.
Please refer to
Item 3 – Legal Proceedings
in our
2018
Form 10-K for more information. There have been no material changes to our litigation since our
2018
Form 10-K, except as set forth in
Note
13 – Commitments and Contingencies
in the accompanying consolidated financial statements included in this Form 10-Q
.
Off-Balance Sheet Arrangements
See
Note 13 – Commitments and Contingencies
to the Consolidated Financial Statements included herein on this report, there are no off-balance sheet arrangements or obligations (including contingent obligations) that have, or are reasonably likely to have, a current or future material effect on our financial condition, changes in the financial condition, revenue or expense, results of operations, liquidity, capital expenditures or capital resources
.
CRITICAL ACCOUNTING POLICIES
We believe that the application of the following accounting policies requires significant judgments and estimates in the preparation of our Consolidated Financial Statements and hence, are critical to our business operations and the understanding of our financial results:
(i) Impairment of Long-lived Assets (other than Goodwill and Intangible Assets with indefinite lives) –
we evaluate our long-lived assets and finite-lived intangible assets using historical and projected data of cash flows as our primary indicator of potential impairment and we take into consideration the seasonality of our business. If the sum of the estimated, undiscounted future cash flows is less than the carrying amount of the asset, then an impairment is recognized for the amount by which the carrying value of the asset exceeds its estimated fair value based on an appraisal or a discounted cash flow calculation. For certain non-income producing properties or for those assets with no consistent historical or projected cash flows, we obtain appraisals or other evidence to evaluate whether there are impairment indicators for these assets.
Besides the write-down of the carrying amount of our parking structure adjacent to our Courtenay Central ETC in Wellington, New Zealand due to earthquake damage during the fourth quarter of 2016, no other impairment losses were recorded for long-lived and finite-lived intangible assets for the three years ended December 31, 2018. Refer to
Note 20 – Insurance Recoveries on Impairment and Related Losses due to Earthquake
in the 2018 Form 10-K
for further details.
(ii) Impairment of Goodwill and Intangible Assets with indefinite lives –
goodwill and intangible assets with indefinite useful lives are not amortized, but instead, tested for impairment at least annually on a reporting unit basis. The impairment evaluation is based on the present value of estimated future cash flows of each reporting unit plus the expected terminal value. There are significant assumptions and estimates used in determining the future cash flows and terminal value. The most significant assumptions include our cost of debt and cost of equity assumptions that comprise the weighted average cost of capital for each reporting unit. Accordingly, actual results could vary materially from such estimates.
No impairment losses were recorded for goodwill and indefinite-lived
intangible assets for the six months
ended June 30, 2019.
F
INANCIAL RISK MANAGEMENT
International Business Risks
Our international operations are subject to a variety of risks, including the following:
|
·
|
|
Currency Risk
: while we report our earnings and net assets in U.S. dollars, substantial portions of our revenue and of our obligations are denominated in either Australian or New Zealand dollars. The value of these currencies can vary significantly compared to the U.S. dollar and compared to each other. We do not hedge the currency risk, but rather have relied upon the natural hedges that exist as a result of the fact that our film costs are typically fixed as a percentage of the box office, and our local operating costs and obligations are likewise typically denominated in local currencies. However, we do have intercompany debt and our ability to service this debt could be adversely impacted by declines in the relative value of the Australian and New Zealand dollar compared to the U.S. dollar. Also, our use of local borrowings to mitigate the business risk of currency fluctuations has reduced our flexibility to move cash between jurisdictions. Set forth below is a chart of the exchange ratios between these three currencies since 1996:
|
In recent periods, we have repaid intercompany debt and used the proceeds to fund capital investment in the United States. Accordingly, our debt levels in Australia are higher than they would have been if funds had not been returned for such purposes. On a company wide basis, this means that a reduction in the relative strength of the U.S. dollar versus the Australian dollar and/or the New Zealand dollar will effectively raise the overall cost of our borrowing and capital and make it more expensive to return funds from the United States to Australia and New Zealand.
Our exposure to interest rate risk arises out of our intermediate term
floating-rate borrowings. To manage the risk, we utilize interest rate derivative contracts to
convert
certain
floating-rate borrowings into fixed-rate borrowings.
It is the Company’s policy to enter into interest rate derivative transactions only to the extent considered necessary to meet its objectives as stated above. The Company does not enter into
these transactions or any other hedging transactions for speculative purposes.
Inflation
We continually monitor inflation and the effects of changing prices. Inflation increases the cost of goods and services used. Competitive conditions in many of our markets restrict our ability to recover fully the higher costs of acquired goods and services through price increases. We attempt to mitigate the impact of inflation by implementing continuous process improvement solutions to enhance productivity and efficiency and, as a result, lower costs and operating expenses. The effects of inflation have not had a material impact on our operations and the resulting financial position or liquidity.
FORWARD LOOKING STATEMENTS
Our statements in this interim quarterly report contain a variety of forward-looking statements as defined by the Securities Litigation Reform Act of 1995. Forward-looking statements reflect only our expectations regarding future events and operating performance and necessarily speak only as of the date the information was prepared. No guarantees can be given that our expectation will in fact be realized, in whole or in part. You can recognize these statements by our use of words such as, by way of example, “may”, “will”, “expect”, “believe”, and “anticipate” or other similar terminology.
These forward-looking statements reflect our expectation after having considered a variety of risks and uncertainties. However, they are necessarily the product of internal discussion and do not necessarily completely reflect the views of individual members of our Board of Directors or of our management team. Individual Board members and individual members of our management team may have a different view as to the risks and uncertainties involved, and may have different views as to future events or our operating performance.
Among the factors that could cause actual results to differ materially from those expressed in or underlying our forward-looking statements are the following:
|
·
|
|
with respect to our cinema operations:
|
|
o
|
|
the number and attractiveness to moviegoers of the films released in future periods;
|
|
o
|
|
the amount of money spent by film distributors to promote their motion pictures;
|
|
o
|
|
the licensing fees and terms required by film distributors from motion picture exhibitors in order to exhibit their films;
|
|
o
|
|
the comparative attractiveness of motion pictures as a source of entertainment and willingness and/or ability of consumers (i) to spend their dollars on entertainment and (ii) to spend their entertainment dollars on movies in and outside the home environment;
|
|
o
|
|
the extent to which we encounter competition from other cinema exhibitors, from other sources of outside-the-home entertainment, and from inside-the-home entertainment options, such as “home theaters” and competitive film product distribution technology, such as, by way of example, cable, satellite broadcast and Blu-ray/DVD rentals and sales, and so called “movies on demand”;
|
|
o
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|
the cost and impact of improvements to our cinemas, such as improved seating, enhanced food and beverage offerings and other improvements;
|
|
o
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|
disruptions from theater improvements;
|
|
o
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the extent to and the efficiency with which we are able to integrate acquisitions of cinema circuits with our existing operations; and,
|
|
o
|
|
certain of our activities are in geologically active areas, creating a risk of damage and/or disruption of real estate and/or cinema businesses from earthquakes.
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·
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with respect to our real estate development and operation activities:
|
|
o
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|
the rental rates and capitalization rates applicable to the markets in which we operate and the quality of properties that we own;
|
|
o
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|
the extent to which we can obtain on a timely basis the various land use approvals and entitlements needed to develop our properties;
|
|
o
|
|
the risks and uncertainties associated with real estate development;
|
|
o
|
|
the availability and cost of labor and materials;
|
|
o
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|
the ability to obtain all permits to construct improvements;
|
|
o
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the ability to finance improvements;
|
|
o
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|
the disruptions from construction;
|
|
o
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|
the possibility of construction delays, work stoppage and material shortage;
|
|
o
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|
competition for development sites and tenants;
|
|
o
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|
environmental remediation issues;
|
|
o
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|
the extent to which our cinemas can continue to serve as an anchor tenant that will, in turn, be influenced by the same factors as those that will influence generally the results of our cinema operations;
|
|
o
|
|
the increased depreciation and amortization expenses as construction projects transition to leased real property;
|
|
o
|
|
the ability to negotiate and execute joint venture opportunities and relationships;
and
|
|
o
|
|
certain of our activities are in geologically active areas, creating a risk of damage and/or disruption of real estate and/or cinema businesses from earthquakes.
|
|
·
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with respect to our operations generally as an international company involved in both the development and operation of cinemas and the development and operation of real estate and previously engaged for many years in the railroad business in the United States:
|
|
o
|
|
our ability to renew, extend or renegotiate our loans that mature in
2019
;
|
|
o
|
|
our ability to grow our Company and provide value to our stockholders;
|
|
o
|
|
our ongoing access to borrowed funds and capital and the interest that must be paid on that debt and the returns that must be paid on such capital;
|
|
o
|
|
expenses, management and Board distraction and other effects of the litigation efforts mounted by James Cotter, Jr. against the Company, including his efforts to cause a sale of voting control of the Company;
|
|
o
|
|
the relative values of the currency used in the countries in which we operate;
|
|
o
|
|
changes in government regulation, including by way of example, the costs resulting from the implementation of the requirements of Sarbanes-Oxley;
|
|
o
|
|
our labor relations and costs of labor (including future government requirements with respect to pension liabilities, disability insurance and health coverage, and vacations and leave);
|
|
o
|
|
our exposure from time to time to legal claims and to uninsurable risks such as those related to our historic railroad operations, including potential environmental claims and health-related claims relating to alleged exposure to asbestos or other substances now or in the future recognized as being possible causes of cancer or other health related problems;
|
|
o
|
|
our exposure to cyber-security risks, including misappropriation of customer information or other breaches of
information
security;
|
|
o
|
|
changes in future effective tax rates and the results of currently ongoing and future potential audits by taxing authorities having jurisdiction over our various companies; and
|
|
o
|
|
changes in applicable accounting policies and practices.
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The above list is not necessarily exhaustive, as business is by definition unpredictable and risky, and subject to influence by numerous factors outside of our control, such as changes in government regulation or policy, competition, interest rates, supply, technological innovation, changes in consumer taste, the weather, and the extent to which consumers in our markets have the economic wherewithal to spend money on beyond-the-home entertainment. Refer to
Item 1A Risk factors
in the 2018 Form 10-K annual report
for more information.
Given the variety and unpredictability of the factors that will ultimately influence our businesses and our results of operation, it naturally follows that no guarantees can be given that any of our forward-looking statements will ultimately prove to be correct. Actual results will undoubtedly vary and there is no guarantee as to how our securities will perform either when considered in isolation or when compared to other securities or investment opportunities.
Finally, we undertake no obligation to update publicly or to revise any of our forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable law. Accordingly, you should always note the date to which our forward-looking statements speak.
Additionally, certain of the presentations included in this interim quarterly report may contain “non-GAAP financial measures.” In such case, a reconciliation of this information to our GAAP financial statements will be made available in connection with such statements.