Item 1A – Risk Factors
Like any other investment, investing in our securities involves risk. Set forth below is a summary of various risk factors that you should consider in connection with your investment in our Company. This summary should be considered in the context of our overall Annual Report on Form 10-K.
BUSINESS RISK FACTORS
We are in the cinema exhibition and real estate businesses. We discuss separately the risks we believe to be material to our involvement in each of these segments. We have discussed separately the risks relating to the international nature of our business activities, our use of leverage, and our status as a controlled corporation. While we report the results of our live theatre operations as real estate operations – because we are principally in the business of renting space to producers rather than in producing plays ourselves – the cinema exhibition and live theatre businesses share certain risk factors and are, accordingly, discussed together.
Cinema Exhibition and Live Theatre Business Risk Factors
Our cinema and live theatre businesses are dependent upon attendance and, accordingly, are vulnerable to the adverse effects of the coronavirus outbreak which has resulted in government ordered closures, imposition of social distancing requirements, and changes in film release patterns, and may even after reopening adversely affect the public’s acceptance of auditorium-based entertainment. These situations may be repeated in the event of future pandemics. As demonstrated by the governmental and public response to the recent COVID-19 Pandemic, businesses that bring large numbers of unrelated people together in an enclosed environment are particularly vulnerable to business disruption in the face of contagious disease with life threatening potential. Not only may government authorities order closures or reduced operating capacities, the public may feel uncomfortable attending our performances in the face of such an infectious disease risk. Our cinema business has high fixed costs (rent and increasing labor) and our revenue in this segment (ticket sales, food and beverage sales, screen advertising fees) is directly tied to our success at attracting customers to our venues.
We are dependent upon third parties to supply the entertainment product we need for our cinemas and live theatres to attract customers.We do not produce the films we show at our cinemas and, generally speaking, we do not produce the plays that are performed at our live theatres. Film distributors have no obligation to supply us with film and producers have no obligation to make use of our live theatres.
We face competition from other sources of entertainment and other entertainment delivery systems. Both our cinema and live theatre operations face competition from “in-home” and mobile device sources of entertainment. These include competition from network, cable and satellite television, internet streaming video services, Video on Demand, the internet, video games and other sources of entertainment. The quality of “in-home” and mobile entertainment systems, as well as programming available on an in-home and mobile basis, has increased, while the cost to consumers of such systems (and such programming) has decreased in recent periods, and some consumers may prefer the security and/or convenience of an “in-home” or mobile entertainment experience to the more public and presentation-oriented experience offered by our cinemas and live theatres. Film distributors have been responding to these developments by, in some cases, decreasing or eliminating the period of time between cinema release and the date such product is made available to “in-home” or mobile forms of distribution. During the COVID-19 Pandemic, many distributors have moved product onto their proprietary streaming service platforms or onto third party platforms (like Netflix) either in lieu of or simultaneously with a cinema release. Also, even before the recent Pandemic, some traditional in-home and mobile distributors had begun the production of full-length movies, specifically for the purpose of direct or simultaneous release to the in-home and mobile markets. Cinemas will need to meet these competitive factors to continue to attract customers. This may require substantial capital outlays and increased labor expense, which exhibitors may not be able to fully pass on to their customers.
We also face competition from various other forms of “beyond-the-home” entertainment, including sporting events, concerts, restaurants, casinos, video game arcades, and nightclubs. Our cinemas also face competition from live theatres and vice versa. Also, social media offerings – such as Facebook, Instagram, TikTok, and Snapchat – appear to be commanding increasing portions of the recreational time of our potential audience.
We operate in a highly competitive environment with many competitors who are significantly larger and may have significantly better access to films and to funds than we do. We are a comparatively small cinema operator and face competition from much larger exhibitors who are able to offer distributors more screens and in more markets – including markets where they may be the exclusive exhibitor – than can we. This may adversely impact our access films, which may adversely affect our revenue and profitability. These larger competitors may also enjoy (i) greater cash flow, which can be used to develop additional cinemas, including cinemas that may be competitive with our existing cinemas, (ii) better access to equity capital and debt, (iii) better visibility to landlords and real estate developers, (iv) for the sake of building volume, to operate cinemas with margins below our threshold for cinema acquisitions and/or development, and (v) better economies of scale. Access to reasonably priced funding is increasingly important as cinema operators need to upgrade their presentation, food and beverage in order to compete with in-home entertainment options.
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In the case of our live theatres, we compete for shows not only with other “for profit” Off-Broadway theatres, but also with “not-for-profit” operators and, increasingly, with Broadway theatres. We believe our live theatres are generally competitive with other Off-Broadway venues. However, due to the increased cost of staging live theatre productions, we are seeing an increasing tendency for plays that would historically have been staged in an Off-Broadway theatre moving directly to larger Broadway venues.
We are vulnerable to a variety of factors which are beyond our control.
Our cinema and live theatre businesses may be vulnerable to fears of terrorism and random shooter incidents could cause customers to avoid public assembly venues. Events, such as terrorist attacks and random shooter incidents may discourage patrons from attending our cinemas. We believe that recent shooting incidents have resulted in material increases in insurance premiums for cinema operators.
Our cinema business may be vulnerable to natural disasters. Natural disasters, such as tropical storms, floods, fires, and earthquakes, have damaged and forced the temporary closure, and are likely in the future to similarly impact, our cinema operations. A material portion of our cinemas are located in seismically active areas, such as California, Hawaii and New Zealand.
We are not in an essential business and accordingly may be more subject to general economic conditions than some other businesses. Going to a movie or a play is a luxury, not a necessity. Furthermore, consumer demand for better and better amenities and food offerings have resulted in an increase of the cost of a night at the movies. Accordingly, a decline in the economy resulting in a decrease in discretionary income, or a perception of such a decline, may result in decreased discretionary spending, which could adversely affect our cinema and live theatre businesses. Adverse economic conditions can also affect the supply side of our business, as reduced liquidity can adversely affect the availability of funding for movies and plays. This is particularly true in the case of Off-Broadway plays, which are often times financed by high net worth individuals (or groups of such individuals) and that are very risky due to the absence of any ability to recoup investment in secondary markets like–– cable, satellite or internet distribution.
We face competition from competitors offering food and beverage and luxury seating as an integral part of their cinema offerings. The number of our competitors offering an expanded food and beverage menu (including the sale of alcoholic beverages) and luxury seating, has continued to grow in recent periods. In addition, more competitors such as AMC are converting existing cinemas to provide such expanded menu offerings and in-theater dining options. The existence of such cinemas may alter traditional cinema selection practices of moviegoers, as they seek out cinemas with such expanded offerings as a preferred alternative to traditional cinemas. In order to compete with these new cinemas, the Company has been required to materially increase its capital expenditures to add such features to many of our cinemas and to take on additional and more highly trained (and, consequently, compensated) staff. Also, the conversion to luxury seating typically requires a material reduction in the number of seats that an auditorium can accommodate which may translate into fewer movie tickets being sold and the shutdown (or limitation of activities) during the time required to complete such modifications.
Our failure to obtain and maintain liquor licenses at any of our cinemas could adversely affect our ability to compete.Each of our cinemas offering alcoholic beverages, is subject to licensing and regulation. Typically, licenses must be renewed annually and may be revoked or suspended for cause at any time. Alcoholic beverage control regulations relate to numerous aspects of the daily operations of each cinema, including minimum age of patrons and employees, hours of operation, advertising, wholesale purchasing, inventory control and handling and storage and dispensing of alcoholic beverages. The failure to receive or retain a liquor license, or any other required permit or license, in a particular location, or to continue to qualify for, or renew licenses, could have a material adverse effect on our profitability, our ability to attract patrons, and our ability to obtain such a liquor license in other locations.
We may be subject to increased labor and benefits costs generally. We are subject to laws governing such matters as minimum wages, working conditions and overtime. As minimum wage rates increase and/or limitations are imposed on our ability to adjust staffing levels to reflect cinema attendances, we may need to increase not only the wages of our minimum wage employees, but also the wages paid to employees at wage rates that are above minimum wage and to incur higher amounts overtime and over-staffing costs. Labor shortages, increased employee turnover and health care mandates could also increase our labor costs.
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Real Estate Development and Ownership Business Risks
Specific Risks Related to Our Real Estate Business.
Our real estate business is vulnerable to the effects from the coronavirus outbreak which has adversely impacted our retail tenants' operations and, in turn, resulted in an increase in tenant defaults and rent reductions. The ongoing COVID-19 Pandemic has resulted in the closure or reduced capacity of certain of our retail tenants. All of our ETCs are anchored by our cinemas, which suffered temporary closures and/or reductions in seating capacities during the COVID-19 Pandemic, thereby reducing foot traffic to our ETCs. In some cases, we have been compelled to provide our tenants with rent abatements or deferrals.
Competition from the Digital Economy may adversely impact our ability to lease and obtain reasonable rents for our properties. An increasing amount of shopping is being done on-line. This has adversely impacted retail tenants (particularly those dealing in consumer goods), which may impact our ability to attract such retailers and to obtain rents at historic levels. This is a particular risk to us, given our high percentage of retail tenants. Also, initially motivated by the need to work from home during the COVID-19 Pandemic, employers are rethinking the scope and extent of the need for their office space. Some markets may have become overbuilt, which may complicate our ability to lease our properties, to obtain reasonable rents, and to finance future development.
Many of our Properties are located in areas prone to natural disasters. Many of our properties are located in areas subject to a risk of fires such as California and Australia; of hurricanes, tropical storms and/or flooding, such as Australia, California, Hawaii and New York, New Jersey, or earthquake. including New Zealand, Hawaii and California. The availability of insurance for natural disasters (particularly earthquake) may be limited.
Our entertainment properties may be more subject to access litigation than other properties. Substantially all our properties consist of, or include as a material component, entertainment venues. These facilities may attract more access-based litigation (for example, claims under the Americans with Disabilities Act) than other types of real estate.
We operate in a highly competitive environment in which we must compete against companies with much greater financial and human resources than we have. We have limited financial and human resources, compared to our principal real estate competitors. In recent periods, we have relied heavily on outside professionals in connection with our real estate development activities. Many of our competitors have significantly greater resources and may be able to achieve greater economies of scale than we can. Given our structure as a taxable corporation, our cost of capital is typically higher than other real estate investment vehicles such as real estate investment trusts.
Risks Related to the Real Estate Industry Generally
Our financial performance will be affected by risks associated with the real estate industry generally. Events and conditions generally applicable to developers, owners, and operators of real property will affect our performance as well. These include (i) changes in the national, regional and local economic climate, (ii) local conditions, such as an oversupply of, or a reduction in demand for, commercial space and/or entertainment-oriented properties, (iii) reduced attractiveness of our properties to tenants, (iv) the rental rates and capitalization rates applicable to the markets in which we operate and the quality of properties that we own, (v) competition from other properties, (vi) inability to collect rent from tenants, (vii) increased operating costs, including labor, materials, real estate taxes, insurance premiums, and utilities, (viii) costs of complying with changes in law and government regulations including those relating to access (for example the Americans with Disabilities Act), energy conservation and environmental matters, (ix) the relative illiquidity of real estate investments, and (x) decreases in sources of both construction and long-term lending as traditional sources of such funding leave or reduce their commitments to real estate-based lending. In addition, periods of rising interest rates or declining demand for real estate (for example, due to competition from internet sellers the demand for brick and mortar retail spaces has declined and may continue to decline, and due to the increasing popularity of tele-commuting demand for traditional office space has likewise declined and may likewise continue to decline), or the public perception that any of these events may occur, could result in declining rents or increased lease defaults. Increasing cap rates can result in lower property values.
Illiquidity of real estate investments could impede our ability to respond to adverse changes in the performance of our properties. Real estate investments are relatively illiquid and, therefore, tend to limit our ability to vary our portfolio promptly in response to changes in economic or other conditions. Many of our properties are either “special purpose” properties that could not be readily converted to general residential, retail or office use. In addition, certain significant expenditures associated with real estate investment, such as real estate taxes and maintenance costs, are generally not reduced when circumstances cause a reduction in income from the investment, and competitive factors may prevent the pass-through of such costs to tenants.
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Real estate development involves a variety of risks.
Real estate development involves a variety of risks, including the following:
The identification and acquisition of suitable development properties. Competition for suitable development properties is intense. Our ability to identify and acquire development properties may be limited by our size and resources. Also, as we and our affiliates are considered to be “foreign owned” for purposes of certain Australian and New Zealand statutes, we have been in the past, and may in the future be, subject to regulations that are not applicable to other persons doing business in those countries.
The procurement of necessary land use entitlements for the project. This process can take many years, particularly if opposed by competing interests. Competitors and community groups (sometimes funded by such competitors) may object based on various factors, including, for example, impacts on density, parking, traffic, noise levels and the historic or architectural nature of the building being replaced. If they are unsuccessful at the local governmental level, they may seek recourse to the courts or other tribunals. This can delay projects and increase costs.
The construction of the project on time and on budget. Construction risks include the availability and cost of financing; the availability and costs of material and labor; the costs of dealing with unknown site conditions (including addressing pollution or environmental wastes deposited upon the property by prior owners); inclement weather conditions; and the ever-present potential for labor-related disruptions.
The leasing or sell-out of the project. Ultimately, there are risks involved in the leasing of a rental property or the sale of a condominium or built-for-sale property. For our ETCs, the extent to which our cinemas can continue to serve as an anchor tenant will be influenced by the same factors as will influence generally the results of our cinema operations. Leasing or sale can be influenced by economic factors that are neither known nor knowable at the commencement of the development process and by local, national, and even international economic conditions, both real and perceived.
The refinancing of completed properties. Properties are often developed using relatively short-term loans. Upon completion of the project, it may be necessary to find replacement financing for these loans. This process involves risk as to the availability of such permanent or other take-out financing, the interest rates, and the payment terms applicable to such financing, which may be adversely influenced by local, national, or international factors.
The ownership of properties involves risk. The ownership of properties involves risks, such as: (i) ongoing leasing and re-leasing risks, (ii) ongoing financing and re-financing risks, (iii) market risks as to the multiples offered by buyers of investment properties, (iv) risks related to the ongoing compliance with changing governmental regulation (including, without limitation, laws and regulations related to access, energy conservation and environmental matters), (v) relative illiquidity compared to some other types of assets, and (vi) susceptibility of assets to uninsurable risks, such as biological, chemical or nuclear terrorism, or risks that are subject to caps tied to the concentration of such assets in certain geographic areas, such as earthquakes. Furthermore, as our properties are typically developed around an entertainment use, the attractiveness of these properties to tenants, sources of finance and real estate investors will be influenced by market perceptions of the benefits and detriments of such entertainment-type properties.
We may be subject to liability under environmental laws and regulations. We own and operate a large number of cinemas and other properties within the U.S. and internationally, which may be subject to various foreign, federal, state and local laws and regulations relating to the protection of the environment or human health. Such environmental laws and regulations include those that impose liability for the investigation and remediation of spills or releases of hazardous materials. We may incur such liability, including for any currently or formerly owned, leased or operated property, or for any site, to which we may have disposed, or arranged for the disposal of, hazardous materials or wastes. Certain of these laws and regulations may impose liability, including on a joint and several liability, which can result in a liable party being obliged to pay for greater than its share, regardless of fault or the legality of the original disposal. Environmental conditions relating to our properties or operations could have an adverse effect on our business and results of operations and cash flows.
Legislative or regulatory initiatives related to global warming/climate change concerns may negatively impact our business. Recently, there has been an increasing focus and continuous debate on global climate change including increased attention from regulatory agencies and legislative bodies. This increased focus may lead to new initiatives directed at regulating an as yet unspecified array of environmental matters. Legislative, regulatory or other efforts in the U.S. to combat climate change could result in future increases in the cost of raw materials, taxes, transportation and utilities for our vendors and for us which would result in higher operating costs for the Company. Also, compliance by our cinemas and accompanying real estate with new and revised environmental, zoning, land-use or building codes, laws, rules or regulations, could have a material and adverse effect on our business. However, we are unable to predict at this time, the potential effects, if any, that any future environmental initiatives may have on our business.
Changes in interest rates may increase our interest expense. Because a portion of our debt bears interest at variable rates, increases in interest rates could materially increase our interest expense. Based on our debt outstanding as ofDecember 31, 2020, if interest rates were to increase by 1%, the corresponding increase in interest expense on our variable rate debt would decrease future earnings
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and cash flows by approximately $2.7 million per year. Potential future increases in interest rates may therefore negatively affect our financial condition and results of operations, and reduce our access to the debt or equity capital markets.
Uncertainty relating to the likely phasing out of LIBOR by 2021 may result in paying increased interest under our credit facilities. Some of our variable rate indebtedness uses LIBOR as a benchmark for establishing the rate. LIBOR is the subject of recent national, international and other regulatory guidance and proposals for reform. On July 27, 2017, the United Kingdom’s Financial Conduct Authority announced that it intends to phase out LIBOR by the end of 2021. These reforms and other pressures may cause LIBOR to disappear entirely or to perform differently than in the past. At this time, it is not possible to predict the effect that any discontinuance, modification or other reform of LIBOR or any other reference rate, or the establishment of alternative reference rates, may have on LIBOR, other benchmarks, or LIBOR-based debt instruments. However, the use of alternative reference rates or other reforms could cause the interest rates payable under our credit facilities to be substantially higher than we would otherwise have expected.
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. 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 would 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.
Risk of adverse government regulation: currently, we believe that relations between the United States, Australia, and New Zealand are good. However, no assurances can be given that these relationships will continue, and that Australia and New Zealand will not in the future seek to regulate more highly the business done by U.S. companies in their countries.
Risk of adverse labor relations: deterioration in labor relations could lead to an increased cost of labor (including future government requirements with respect to pension liabilities, disability insurance and health coverage, and vacations and leave).
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Trade disputes and geopolitical instability outside of the U.S. may adversely impact the U.S. and global economies.
In 2020, global growth weakened, trade tensions heightened, and several emerging markets experienced significant downturns as macroeconomic and geopolitical developments weighed on market sentiments. Governmental policies of developed economies, such as the U.S., have a substantial effect on emerging markets, and the consequences of a trade war between two developed countries, like that of the U.S. and China, could further contribute to the adverse economic and political conditions of emerging and other developed economies. Additionally, North Korea’s nuclear weapons capabilities continue to be an ongoing security concern and worsening relations between the U.S. and North Korea continue to create a global security issue that may adversely affect international business and economic conditions. While it is difficult for us to predict the effect of such trade wars and heightened geopolitical and economic instability on our business, they could lead to currency devaluation, economic and political turmoil, market volatility, and a loss of consumer confidence in the broader U.S. economy.
Risks Associated with Certain Discontinued Operations
Certain of our subsidiaries were previously in industrial businesses. As a consequence, properties that are currently owned or may have in the past been owned, by these subsidiaries may prove to have environmental issues. Where we have knowledge of such environmental issues and are in a position to make an assessment as to our exposure, we have established what we believe to be appropriate reserves, but we are exposed to the risk that currently unknown problems may be discovered. These subsidiaries are also exposed to potential claims related to exposure of former employees to coal dust, asbestos, and other materials now considered to be, or which in the future may be found to be, carcinogenic or otherwise injurious to health.
Operating, Financial Structure and Borrowing Risk
Typically, we have negative working capital. As we invest our cash in new acquisitions and the development of our existing properties, we have negative working capital. This negative working capital is typical in the cinema exhibition industry because our short-term liabilities are in part financing our long-term assets instead of long-term liabilities financing short-term assets, as is the case in other industries such as manufacturing and distribution. In addition, the new lease accounting standard requires us to include our operating lease liabilities on our consolidated balance sheet. See Note 2 - Summary of Significant Accounting Policies – Operating Leases.
We are subject to complex taxation, changes in tax rates, adoption of new U.S. or international tax legislation and disagreements with tax authorities that could adversely affect our business, financial condition or results of operations. We are subject to many different forms of taxation in both the U.S. and in foreign jurisdictions where we operate, such as the U.S. Tax Cuts and Jobs Act signed into law in December 2017. The new laws are still evolving and require we interpret the provisions of the law as we try to comply with them. The costs of compliance with these laws and regulations are high and are likely to increase in the future. Any failure on our part to comply with these laws and regulations can result in negative publicity and diversion of Management’s time and effort and may subject us to significant liabilities and other penalties.
We have substantial short- to medium-term debt. Generally speaking, we have historically financed our operations through relatively short-term debt. No assurances can be given that we will be able to refinance this debt, or if we can, that the terms will be reasonable. However, as a counterbalance to this debt, we have certain unencumbered real property assets, which could be sold to pay debt or encumbered to assist in the refinancing of existing debt, if necessary.
We have substantial lease liabilities. Most of our cinemas operate in leased facilities. These leases typically have “cost of living” or other rent adjustment features and require that we operate the properties as cinemas. A downturn in our cinema exhibition business might, depending on its severity, adversely affect the ability of our cinema operating subsidiaries to meet these rental obligations. Even if our cinema exhibition business remains relatively constant, cinema level cash flow will likely be adversely affected unless we can increase our revenue sufficiently to offset increases in our rental liabilities.
If our company suffers cybersecurity attacks, data security challenges or privacy incidents that result in security breaches, we could suffer a loss of sales, additional liability, reputational harm or other adverse consequences. The effective operation of our international businesses depends on our network infrastructure, computer systems, physical, virtual and/or cloud based, and software. Our information technology systems collect and process information provided by customers, employees and vendors. In addition, third-party vendors’ systems process ticketing for our theaters. These various information technology systems and the data stored within them are subject to penetration by cyber attackers. We utilize industry accepted security protocols to securely maintain and protect proprietary and confidential information. However, in spite of our best efforts, our information systems may fail to operate for a variety of technological or human reasons. An interruption or failure of our information technology systems and of those maintained by our third-party providers could adversely affect our business, liquidity or results of operations and result in increases in reputational risk, litigation or penalties. Furthermore, any such occurrence, if significant could require us to expend resources to remediate and upgrade information technology systems. Since 2015, we have annually procured cybersecurity insurance to protect against cybersecurity risks; however, we cannot provide any assurance regarding the adequacy of such insurance coverage.
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Our stock is thinly traded. Our stock is thinly traded, with an average daily volume in 2020 of only approximately 111,234 shares of Class A Stock. Our Class B Stock is very thinly traded with even less volume. This can result in significant volatility, as demand by buyers and sellers can easily get out of balance.
Ownership and Management Structure, Corporate Governance, and Change of Control Risks
Ongoing disputes among the heirs of James J. Cotter, Sr., over the past six years have caused, and may continue to cause, uncertainty regarding the ongoing control of our Company by the Cotter family and have distracted and may continue to distract the time and attention of our officers and directors from our business and operations and may ultimately interfere with the effective management of the Company. Up until his death on September 13, 2014, James J. Cotter, Sr., the father of Ellen Cotter, James J. Cotter, Jr. and Margaret Cotter, was our controlling stockholder, having the sole power to vote approximately 66.9% of the outstanding Class B Voting Common Stock (the “Class B Stock”) of our Company. Under applicable Nevada Law, a stockholder holding two-thirds of our Company’s Class B Stock has the power at any time, with or without cause, to remove any one or more directors (up to and including the entire board of directors) by written consent taken without a meeting of the stockholders. Over the past six years there have been a variety of disputes between Ellen Cotter and Margaret Cotter, on one side, and James J. Cotter, Jr., on the other side, as to the control and disposition of this Class B Stock. James Cotter, Jr., passed away on March 10, 2021. The ultimate impact of the passing of James J. Cotter, Jr. upon the currently pending disputes relating to the control of our Company is uncertain.
Ellen Cotter and Margaret Cotter, in their individual capacities and as the Co-Executors of the Estate of James J. Cotter (the “Cotter Estate”) and as the Co-Trustees of the Living Trust established by the Declaration of trust dated June 5, 2013, by James J. Cotter, Sr., as amended the “Cotter Living Trust”) currently vote approximately 72% of the outstanding Class B stock. Of this approximately 67% of such Class B Stock is held by the Cotter Estate and the Cotter Living Trust, ultimately for distribution into a voting sub-trust (the “Cotter Voting Trust”) of the Cotter Living Trust. Margaret Cotter is the sole trustee of the Cotter Voting Trust. During his lifetime, James J. Cotter, Jr. in litigation (the “Trust Case”) brought in the California Superior Court for Los Angeles County (the “California Superior Court”), among other things, sought to have Ellen Cotter and Margaret Cotter removed as Trustees of the Cotter Living Trust, to have Margaret Cotter removed as the Trustee of the Cotter Voting Trust and to have the shares of Class B Stock held by the Cotter Estate, the Cotter Living Trust and/or the Cotter Voting Trust (and representing a controlling interest in our Company) sold. Ellen Cotter and Margaret Cotter have advised that they believe that this stock should be retained and held for as long as possible for the long-term benefit of grandchildren of James J. Cotter, Sr, as they believe is provided for in the document governing the Cotter Voting Trust and have opposed the efforts of James J. Cotter, Jr. to remove them as Trustees and to have this stock sold.
Upon motion brought by James J. Cotter, Jr., in the Trust Case, the California Court appointed a guardian ad litem (the “GAL”) to represent the interests of these grandchildren (who consist of the children of Margaret Cotter and of James J. Cotter, Jr.). The GAL has motions pending (i) to divide the Voting Trust into separate trusts, one for the benefit of Margaret Cotter’s children and one for the benefit of James J. Cotter, Jr.’s children, (ii) in order to achieve diversification of the assets of these trusts, to sell the Class B stock eventually to be held by these trusts, and (iii) to immediately retain a valuation expert to advise him as to value of the Class B Voting Stock to be eventually held by the Voting Trust. These motions are opposed by Ellen Cotter and Margaret Cotter acting in their capacity as Executors and Trustees. A motion has also been brought by Margaret Cotter and Ellen Cotter, as Co-Trustees of the Cotter Living Trust, to disqualify the GAL on the basis that he cannot simultaneously represent the interests of Margaret Cotter and James J. Cotter’s, Jr’s, children as the interests of those children differ. That motion was denied by the California Superior Court and that order is currently subject to appeal.
As a consequence of the California Superior Court’s ruling in the Trust Case that the amendment to the trust document memorializing the Cotter Trust supported by James J. Cotter, Jr. was not valid and that the amendment supported by Ellen Cotter and Margaret Cotter was the controlling document, Ellen Cotter and Margaret Cotter, as Co-Trustees of the Cotter Living Trust, have brought a motion to enforce the no-contest clause of the Cotter Voting Trust, which if successful would remove James J. Cotter, Jr and his descendants as beneficiaries of the Cotter Voting Trust, and moot the GAL’s motion to divide up the Cotter Voting Trust and to sell the Class B Voting Stock to be held in the Cotter Voting Trust. It would also moot Mr. Cotter, Jr.’s motions (to the extent that they survive his passing), as he would be neither a trustee nor a beneficiary of the Cotter Living Trust. Mr. Cotter, Jr. has opposed the Co-Trustees motion to enforce the no-contest clause and brought an Anti-SLAPP claim against the Co-Trustees. That Anti-SLAPP claim was dismissed by the California Superior Court, which dismissal is now on appeal.
While our Company is not a party to the Trust Case, our Company has appeared in court, to protect (a) the business plan adopted by our Board of Directors and its determination that stockholder interests are best achieved by continuing with that business plan rather than selling our Company at this time and (b) in the event that the California Superior Court were to disregard the advice of our Board and order that a controlling interest in our Company be marketed or sold, that the interests of our Company and stockholders generally are protected in the context of any such change of control transaction. Our Company’s participation in the Trust Case since August 2017 has been overseen by a Special Independent Committee of the Board of Directors currently comprised of directors Doug McEachern and Judy Codding.
We continue to believe that, whether or not a final determination is made to sell the voting shares, the very commencement of a process to sell a controlling interest in our Company would pose risks to our Company and our stockholders for a variety of reasons,
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including the resultant potential for: (i) distraction of Management and key employees from focusing on the conduct of our business, including the implementation of our three year business strategy, (ii) incurrence of additional general and administrative costs due to the need to implement employee retention programs and to incur legal expenses of the type and at levels not typically required in the ordinary conduct of our Company’s business, (iii) interference with contractual relationships, negotiations and potential negotiations with third parties important to our Company’s business, including, without limitation, current and future lenders, tenants, landlords, suppliers and co-developers, (iv) increased difficulty in hiring and retaining high quality employees, and (v) exposure of our Company to potential litigation claims of the type which often accompany any extraordinary corporate transactions together with the expense, distraction and time loss that typically results from any such litigation. If a decision to sell a controlling interest is made by the California Superior Court, then there would be the additional risk that control might be sold to an unqualified purchaser who might exploit such control position in a manner not consistent with the best interests of our Company or stockholders generally.
The California Superior Court, in the Trust Case, has jurisdiction over a potentially controlling block of our voting power. Should the California Superior Court order the sale of the Class B Stock intended for transfer to the Cotter Voting Trust, and such sale be completed, then there may be a change of control of our Company (depending on, among other things, who the ultimate purchaser(s) of such shares might be, the number of shares of Class B Stock distributed by the Cotter Estate to the Cotter Living Trust, and whether the California Superior Court orders a sale of all or only some portion to the Class B Stock to be held by the Cotter Voting Trust). We cannot predict what reactions, including appeals or other steps, might be taken by Ellen Cotter and Margaret Cotter in their respective capacities as Trustees under the Cotter Living Trust, or in other capacities (for example, as Co-Executors of the Cotter Estate or as stockholders acting in their own right), should the California Superior Court make such an order. We do note, however, that Ellen Cotter and Margaret Cotter have publicly stated that, if there is to be a sale of controlling shares, they intend to be the purchasers of such shares. We also cannot predict what action our Board of Directors would take in response, if any. However, our Board of Directors has an obligation to act in the best interest of our Company, and in the event the California Superior Court were to order a sale of the Class B Stock held by the Cotter Living Trust, our Board of Directors would be obligated to consider the interests of our Company and to act accordingly.
As foreshadowed in the beginning of this discussion, the recent passing of James J. Cotter, Jr., has rendered uncertain the status of his motions to remove Ellen Cotter and Margaret Cotter as Trustees, as to the GAL’s ongoing status given the differing interests of the children of Margaret Cotter and the children of James J. Cotter, Jr., and the GAL’s motion to divide the Voting Trust and sell the shares of Class B Stock held by the Cotter Estate, the Cotter Living Trust and/or the Cotter Voting Trust.
Furthermore, the uncertainty as to the future management and control of our Company could potentially adversely impact, among other things (i) our ability to develop and maintain favorable business relationships, (ii) our ability to attract and retain talented and experienced directors, executives and employees, (iii) the compensation and other terms needed to attract and retain such individuals (including, without limitation, the potential need for retentions agreements and other incentive arrangements typically put into place when control of a public company is uncertain), (iv) our ability to borrow money on favorable long-term terms, and (v) our ability to pursue and complete long-term business objectives.
The interests of our controlling stockholder may conflict with your interests. As of December 31, 2020, the Cotter Estate and the Cotter Living Trust beneficially owned 66.9% of our outstanding Class B Stock. At the present time, according to the books of the Company, Ellen Cotter and Margaret Cotter vote (including their direct holdings of 50,000 shares and 35,100 shares respectively of the Class B Stock), Class B Stock representing 71.9% of our outstanding Class B Stock. Our Class A Stock is non-voting, while our Class B Stock represents all of the voting power of our Company. For as long as the Cotter Estate, the Cotter Trust and/or the Cotter Voting Trust (referred to herein collectively as the “Cotter Entities”) continue to own shares of Class B Stock representing more than 50% of the voting power of our common stock, the Cotter Entities will be able to elect all of the members of our Board of Directors and determine the outcome of all matters submitted to a vote of our stockholders, including matters involving mergers or other business combinations, the acquisition or disposition of assets, the incurrence of indebtedness, the issuance of any additional shares of common stock or other equity securities and the payment of dividends on common stock. The Cotter Entities will also have the power to prevent or cause a change in control and could take other actions that might be desirable to the Cotter Entities but not to other stockholders. To the extent that the Cotter Entities hold more than two-thirds of our outstanding Class B Stock, the Cotter Entities will have the power at any time, with or without cause, to remove any one or more Directors (up to and including the entire Board of Directors) by written consent taken without a meeting of the stockholders.
In addition, the Cotter Estate or the Cotter Living Trust and/or their respective affiliates have controlling interests in companies in related and unrelated industries. In the future, we may participate in transactions with these companies (see Note 21 – Related Parties).
While controlling stockholders may owe certain fiduciary duties to our Company and/or minority stockholders, these duties are limited. No assurances can be given that the Cotter Entities will not take action that, while beneficial to them and legally enforceable, would not necessarily be in the best interests of our Company and/or our stockholders generally.
We are a “Controlled Company” under applicable NASDAQ Regulations. As permitted by those Regulations, our Board has elected to opt-out of certain corporate governance rules applicable to non-controlled companies. Generally speaking, the NASDAQ
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requires listed companies to meet certain minimum corporate governance provisions. However, a “Controlled Company”, such as we, may elect not to be governed by certain of these provisions. Our Board of Directors has elected to exempt our Company from requirements that (i) at least a majority of our Directors be independent and (ii) nominees to our Board of Directors be nominated by a committee comprised entirely of independent Directors or by a majority of our Company’s independent Directors. Notwithstanding the determination by our Board of Directors to opt-out of these NASDAQ requirements, we believe that a majority of our Board of Directors is nevertheless currently comprised of independent Directors. As a practical matter, subject to their fiduciary duties, Ellen Cotter and Margaret Cotter control the composition of our Board of Directors.
We depend on key personnel for our current and future performance. Our current and future performance depends to a significant degree upon the continued contributions of our senior management team and other key personnel. The loss or unavailability to us of any member of our senior management team or a key employee could significantly harm us. We cannot assure you that we would be able to locate or employ qualified replacements for senior management or key employees on acceptable terms. Due to the uncertainty of our control situation, the ongoing availability of these employees and our ability to replace them is uncertain.
Item 1B – Unresolved Staff Comments
None.
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Item 2 – Properties
EXECUTIVE AND ADMINISTRATIVE OFFICES
Since February 2017, our executive headquarters has been in a 24,000 square foot Class B office building with 72 parking spaces located at 5995 Sepulveda Boulevard, Suite 300, Culver City, California 90230, which we purchased on April 11, 2016. We occupy the third floor as our headquarters’ offices from which we conduct our executive and administrative operations, however, due to COVID-19, our staff are currently working remotely. On May 27, 2020, we leased on a multi-year basis the entire second floor to WWP Beauty (wwpinc.com), a global company with over 35 years of experience providing the cosmetics and personal care industries with a range of packaging needs.
We own an 8,300 square foot office building in Melbourne, Australia, approximately 5,000 square feet of which serve as the headquarters for our Australian and New Zealand operations (the remainder being leased to an unrelated third party). We maintain our accounting personnel and certain IT and operational personnel in approximately 5,400 square feet of office spaces located in our Courtenay Central ETC in Wellington, New Zealand, however due to the ongoing temporary closure of Courtenay Central and COVID-19, our staff are now working remotely. We also occupy approximately 3,500 square feet at our Village East leasehold property in New York for administrative purposes.
ENTERTAINMENT PROPERTIES
Entertainment Use Leasehold Interests
As of December 31, 2020, we lease approximately 1,909,000 square feet of completed cinema space in the United States, Australia, and New Zealand as follows:
REAL ESTATE INTERESTS
Fee Interests
In the United States, as of December 31, 2020, we owned approximately 101,000 square feet of improved real estate comprised of three live theatre buildings, which include approximately 10,000 square feet of leasable space, the fee interest in our U.S. headquarters in Culver City, California, and the fee interest in our Cinemas 1,2,3 in Manhattan (held through a limited liability company in which we have a 75% managing member interest). We also own various properties relating to our historic railroad business, including the Reading Viaduct in central Philadelphia.
In Australia, as of December 31, 2020, we owned approximately 1,355,000 square feet of land at seven locations. Most of this land is located in the states of Queensland, New South Wales, and Western Australia. Of these fee interests, approximately 208,000 square feet are currently improved with cinemas. We own an approximately 23,000 square foot parcel currently improved with an approximately 22,000 square foot office building that we intend to integrate with and into our Newmarket Village ETC and that, accordingly, is not included in the above table. In 2018, we acquired a building of 17,000 square feet which is bordered on three sides by our Auburn ETC for $3.5 million (AU$ 4.5 million). This asset was listed for sale in January 2021.
In New Zealand, as of December 31, 2020, we owned approximately 3,371,000 square feet of land at five locations. This includes our Courtenay Central ETC in Wellington and the development land adjacent to our Courtenay Central ETC, and the fee interests underlying four cinemas in New Zealand, which properties include approximately 6,000 square feet of ancillary retail space. The foregoing includes the 70.4-acre Manukau/Wiri site, which was sold on March 4, 2021 for NZ$77.2 million (US$56.1 million).
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Live Theatres
Included among our real estate holdings are three Off-Broadway style live theatres, operated through our Liberty Theatres subsidiary. We license theatre auditoriums to the producers of Off-Broadway theatrical productions and provide various box office and food & beverage services. The terms of our licenses are, naturally, principally dependent upon the commercial success of our tenants. While we attempt to choose productions that we believe will be successful, we have no control over the production itself. At the current time, we have two single-auditorium theatres in Manhattan:
the Minetta Lane (399 seats); and
the Orpheum (347 seats).
We also own a four-auditorium theatre complex, the Royal George Theatre in Chicago (Mainstage 448 seats, Cabaret 199 seats, The Great Room 100 seats, and The Gallery 50 seats), which has ancillary retail, office space, and parking. This property is currently being marketed for sale.
Liberty Theatres is primarily in the business of licensing theatre space. However, we may from time to time participate as an investor in a play, which can help facilitate the exhibition of the play at one of our theatres and do from time to time rent space on a basis that allows us to share in a production’s revenues or profits. Predominantly, rental revenues, expenses, and profits are reported as part of the real estate segment of our business.
Joint Venture Interests
At December 31, 2020, our real estate joint ventures comprise of a 75% managing member interest in the limited liability company that owns our Cinemas 1,2,3 property and a 50% managing member interest in Shadow View Land & Farming, LLC, which owns an approximately 202-acre property in Coachella, California that was zoned for residential and mixed use. In December 2020, the Coachella property was classified as held for sale as part of our strategy to monetize certain real estate assets. On March 5, 2021, this property was sold for $11.0 million. As a 50% member in Shadow View Land & Farming LLC, the Company received 50% of the net sale proceeds.
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OPERATING PROPERTY
As of December 31, 2020, we own fee interests in approximately 824,000 square feet of income-producing properties (including certain properties principally occupied by our cinemas) as follows:
United States
including a 72-space parking structure
4. Orpheum Theatre 0 / 5,000 n/a 1,393 Real Estate 126 2nd Avenue, Manhattan, NY
plus a 55-space parking structure
Australia
plus 588 parking spaces Real Estate
plus 721 parking spaces Real Estate
New Zealand
2. Dunedin Cinema 0 / 25,000 n/a 6,106 Cinema Exhibition 33 The Octagon, Dunedin
(1)Rental square footage refers to the amount of potential area available to be rented to third parties. A number of our real estate holdings include entertainment components rented to one or more of our subsidiaries at fair market rent. The rental area to such subsidiaries is noted under the entertainment square footage.
(2)Represents the percentage of available rental square footage currently leased or licensed to third parties.
(3)Refers to the net carrying value of the land and buildings of the property presented as “Operating Property” in our Consolidated Balance Sheet as of December 31, 2020 (net of any impairments recorded).
(4)Owned by a limited liability company in which we hold a 75% managing member interest. The remaining 25% is owned by Sutton Hill Capital, LLC (“SHC”), a company owned in equal parts by the Cotter Estate or the Cotter Trust and a third party.
(5)Our Cannon Park City and Discount Centers are operated as a single ETC.
(6)Our Courtenay Central parking structure has been demolished due to damage suffered as a result of an earthquake on November 14, 2016. For further information on the on-going development projects of these properties, refer to succeeding section "Investment and Development Property."
(7)This schedule does not include (i) our leasehold assets on cinemas under leased-facility model, (ii) those portions of the owned assets that are not income-producing or purely used for administrative purposes, and (iii) our assets on our legacy business principally in Pennsylvania.
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LONG-TERM LEASEHOLD OPERATING PROPERTY
In certain cases, we have long-term leases that we view more akin to real estate investments than cinema leases. As of December 31, 2020, we had approximately 90,000 square feet of space subject to such long-term leases, which are reported as part of our Cinema Exhibition segment, detailed as follows:
In United States
In Australia
(1)Rental square footage refers to the amount of area available to be rented to third parties. A number of our real estate holdings include entertainment components rented to one or more of our subsidiaries at fair market rent. The rental area to such subsidiaries is noted under the entertainment square footage.
(2)Represents the percentage of rental square footage currently leased to third parties.
(3)Refers to the net carrying value of the leasehold property presented as “Operating Property” in our Consolidated Balance Sheet as of December 31, 2020 (net of any impairments recorded).
INVESTMENT AND DEVELOPMENT PROPERTY
We are engaged in several investment and development projects relative to our currently undeveloped parcels of land. In addition, we are currently executing, or still pursuing to execute, our redevelopment plans on several of our existing developed properties to take them to their highest and best use. The following table summarizes our investment and development projects as of December 31, 2020:
Property(1) Acreage Net BookValue(2)(US Dollarsin thousands) Status
Australia
New Zealand
(1)A number of our real estate holdings include additional land held for development. In addition, we have acquired certain parcels for future development.
(2)Refers to the recorded values of our non-operating and currently in-development stage properties, which are comprised of land, building, development costs and capitalized interest, and presented as “Investment and Development Property” in our Consolidated Balance Sheet as of December 31, 2020. Not included in this number is the book value of those portions of such properties which have already been developed. For example, in the case of our Auburn Redyard shopping center, only the 114,000 square feet of developable land (out of the total 519,000 square feet of land comprising the entire center) is included in this calculation.
Some of our income producing properties and our investment and development properties carry various debt encumbrances based on their income streams and geographic locations. For an explanation of our debt and the associated security collateral please see Note 11 – Borrowings to our 2020 consolidated financial statements.
OTHER PROPERTY INTERESTS AND INVESTMENTS
We own the fee interests in various parcels related to our historic railroad operations, currently comprised of 197-acres principally in Pennsylvania. These acres consist primarily of vacant land. With the exception of certain properties located in Philadelphia (including
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the raised railroad bed near Center City, known as the Reading Viaduct), the properties are principally located in rural areas of Pennsylvania. These properties are unencumbered by any debt.
Item 3 – Legal Proceedings
The information required under Part I, Item 3 – Legal Proceedings is incorporated by reference to the information contained in Note 13 – Commitments and Contingencies to the Consolidated Financial Statements included herein in Part II, Item 8 – Financial Statements and Supplementary Data on this Annual Report on Form 10-K.
Item 4 – Mine Safety Disclosures
Not Applicable.
PART II
Item 5 – Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
MARKET INFORMATION
Our common stock is traded on the NASDAQ under the symbols RDI (Class A Stock) and RDIB (Class B Stock).
As of March 29, 2021, the approximate number of common stockholders of record was 390 for Class A Stock and 52, for Class B Stock.
We have never declared a cash dividend on either class of our common stock, and we have no current plans to declare a dividend.
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Performance Graph
The following line graph compares the cumulative total stockholder return on RDI’s Class A Stock for the five-year period ended December 31, 2020 against the cumulative total return as calculated by the NASDAQ composite, a peer group of public companies engaged in the motion picture theater operator industry and a peer group of public companies engaged in the real estate operator industry. Measurement points are the last trading day for each of the five-years ended December 31, 2020. The graph assumes that $100 was invested on December 31, 2015 in our Class A Stock, the NASDAQ composite and the noted peer groups, and assumes reinvestment of any dividends. The stock price performance on the following graph is not necessarily indicative of future stock price performance.
The following performance graph shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, nor shall this information be incorporated by reference into any future filing under the Securities Act or the Exchange Act, except to the extent that we specifically incorporate it by reference into a filing.
Reading underperformed in 2020 compared to the market due to the COVID-19 pandemic and its aftermath, delayed releases of movies and/or movies going straight to streaming or PVOD, and a weakening foreign currency exchange rate.
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UNREGISTERED SALES OF EQUITY SECURITIES
Between December 14, 2020 and December 16, 2020, the Company awarded 114,803 non-transferable restricted stock units to certain members of the management team and other key employees pursuant to the 2020 Stock Incentive Plan; each restricted stock unit is subject to time-based vesting restrictions and once vested will be convertible into one share of the Company's Class A Stock. The awards were compensatory in nature without cost to the officers and were made pursuant to exemptions from registration under the Securities Act of 1933, including Regulation D.
REPURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
None.
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Item 6 – Selected Financial Data
Part II, Item 6 is no longer required as the Company has adopted certain provisions within the amendments to Regulation S-K that eliminate Item 6.
Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)
INDEX Page
Business Overview 50
Recent Developments 43
Results of Operations 50
Liquidity and Capital Resources 59
Contractual Obligations, Commitments and Contingencies 62
Financial Risk Management 63
Critical Accounting Estimates 63
IMPACT OF THE COVID-19 PANDEMIC
During 2020, our Company has had to adapt to the impact of COVID-19. In March of 2020, we temporarily closed all of the Company’s cinemas in the United States, Australia, and New Zealand in accordance with the directions and recommendations of the relevant local, state and federal authorities. In the U.S., we also temporarily closed our live theatres.
As of the date of this Report, our Company has reopened 86% of its cinema operations as follows:
i.In Australia, 92% of our cinemas have reopened and we continue to execute on a number of new safety and cleaning protocols. As of today, depending on the Australian State, governmentally imposed physical distancing requirements have been removed or are restricted to 75% of available capacity. On March 28, 2021, Queensland announced a 3-day snap lockdown, so two of our sites have been temporarily closed.
ii.In New Zealand, all of our cinemas have reopened, with the exception of our Reading Cinemas at Courtenay Central, which remains temporarily closed due to seismic concerns. Our reopened cinemas have no physical distancing requirements in place, and we continue to execute our new safety and cleaning protocols.
iii.In the United States, 79% of our cinemas have reopened with an elevated set of cleaning protocols and new operating strategies, including physical distancing through reduced seat counts. We expect to announce opening dates for our other cinemas and live theatres in the U.S. once local government authorities remove restrictions and new and compelling movies become available.
With respect to our ETCs, trading restrictions enforced by the local governments adversely impacted the trading ability of many of our third-party tenants to a significant degree. Most of our ETCs in Australia remained open as our tenant portfolio includes tenants who operate “essential” businesses, even though many smaller tenants could not trade. In New Zealand, the tenants operating at Courtenay Central were required to close on March 26, 2020 because of the government’s lockdown but have since reopened.
BUSINESS OVERVIEW
We are an internationally diversified company principally focused on the development, ownership, and operation of entertainment and real estate assets in the United States, Australia, and New Zealand. Currently, we operate in two business segments:
Cinema exhibition, through our 61 cinemas.
Real estate, including real estate development and the rental of retail, commercial, and live theatre assets.
We have consistently stated our belief that these two business segments complement one another, as we have used the comparatively consistent cash flows generated by our cinema operations to fund the front-end cash demands of our real estate development business. Now, we are relying upon income from our real estate assets, and the imbedded value in those assets, to support our Company through the COVID-19 crisis. As we continue to navigate the uncertainty and challenges posed by the global COVID-19 pandemic, we are
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steadfast in our belief that this two-pronged international business strategy has supported the strength and long-term viability of our Company. We believe that our strong real estate base sets us apart and provides us with flexibility and asset strength.
As of the date of this Report, we operate our worldwide cinema exhibition businesses under various brands:
in the U.S., under the Reading Cinemas, Angelika Film Centers, and Consolidated Theatres brands.
in Australia, under the Reading Cinemas, the State Cinema, and our unconsolidated joint venture, Event Cinemas brands.
in New Zealand, under the Reading Cinemas and our unconsolidated joint ventures, Rialto Cinemas brands.
Our Short-Term Business Strategy: Adapting to COVID-19
We believe our Company’s diverse business structure has and will continue to provide financial security through the COVID-19 pandemic and other such economic downturns. Our priority is to adapt and expand our short-term business strategy to meet the needs of the current economic climate.
The pandemic has disrupted the cinema exhibition business by way of local government mandated closures, occupancy restrictions, forced delays of major motion picture releases and simultaneous releases of film product to theatrical as well as streaming platforms. To mitigate this, in the U.S., we launched a streaming platform called Angelika Anywhere in December of 2020, which is curated for film lovers of independent and foreign film, documentaries, and the more specialized movies from the major studios. We anticipate expanding this platform to Australia and New Zealand in 2021. To further mitigate the impacts of the pandemic, in the U.S., we began an Eats at Home program whereby customers pickup or have cinema food delivered. We expect these initiatives have and will provide additional streams of revenue through and after the COVID-19 pandemic.
In order to emerge from the crisis in a stronger position, we believe that the potential sale of non-core real estate assets will provide the cash necessary to meet our short-term liquidity demands. In December 2020, we classified the non-income producing land in Coachella, California and Manukau, New Zealand as held for sale as part of our strategy to monetize certain real estate assets to provide the cash necessary to support our Company through the COVID-19 pandemic. On March 4, 2021, we sold our Manukau land for NZ$77.2 million (US$56.1 million). On March 5, 2021, we sold our Coachella land for $11.0 million.As a 50% member in Shadow View Land & Farming LLC, the Company received 50% of the sale proceeds.
Our Long-Term Business Strategy: Applying a Synergistic Approach
Post-COVID-19, we believe the cinema exhibition business to be one that will likely continue to generate consistent cash flows in the years ahead, even in a recessionary or inflationary environment. This is based on our belief that people will continue to spend a reasonable portion of their entertainment dollars 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. We believe that the advent of an array of streaming and mobile video services is more of a threat to the delivery of traditional in-home forms of entertainment (such as cable and satellite providers) than it is to the exhibition industry. We believe that historically, our industry has benefited as the amount of quality product available for exhibition has increased. During the pandemic, we faced a new issue wherein certain major distributors shortened or skipped the theatrical window and went straight to streaming, PVOD or VOD. Despite the current situation, the amount of product coming to consumers is in some ways overwhelming. We believe that this means that cinema exhibition is going to be an increasingly important way for content providers to establish an identity for their product that will carry over into the streaming and mobile video market and aid consumers in their programming choices. We believe that our cinemas will be critical to provide the “Grand Opening” needed for product providers attempting to compete in the streaming market. This being the case, we likewise believe that the entire cinema-going experience needs to be special to provide this “Grand Opening” feel. Acting on that belief, we have focused in recent periods on the upgrading of our cinemas to feature enhanced safety and cleanliness protocols, luxury lounge seating, state-of-the-art sound, large format screens, and enhanced food and beverage. We have invested in technology to make our reservation system more user friendly and to encourage customer loyalty.
We believe the cinema exhibition business to be a well-established business with most markets either adequately screened or over-screened and we see growth in our cinema exhibition business coming principally from (i) the enhancement of our existing cinemas (for example, by the addition of luxury recliner seating and expanding our food and beverage program), (ii) the development, in select markets, of specialty cinemas and where applicable, new cinemas in underserved markets, and (iii) the opportunistic acquisition of already existing cinemas. We continue to focus on the development and redevelopment of our existing assets (particularly our real estate assets in (i) New York, (ii) Culver City, California (iii) Queensland and Western Australia in Australia, and (iv) Wellington, New Zealand.
We see ourselves principally as a geographically diversified cinema exhibition and real estate company and intend to add to stockholder value by building the value of our portfolio of tangible assets, including both entertainment and other types of land and “brick and mortar” assets. We believe that this diversified strategy has shown its value during this COVID pandemic timeframe. We endeavor to maintain a reasonable asset allocation between our domestic and international assets and operations, and between our cash-generating cinema operations and our cash-consuming real estate investment and development activities. We believe that, by
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blending the cash generating capabilities of a cinema operation with the investment and development opportunities of our real estate operations, our business strategy is unique among public companies.
Key Performance Indicators
A key performance indicator utilized by Management is food and beverage Spend Per Patron (“SPP”).
One of our strategic priorities is upgrading the food and beverage menu at a number of our global cinemas. We use SPP as a measure of our performance as compared to the performance of our competitors, as well as a measure of the performance of our food and beverage operations. While ultimately, the profitability of our food and beverage operations depends on a variety of factors, including labor cost and cost of goods sold, we think that this calculation is important to show how well we are doing on a top line basis. Due to the COVID-19 pandemic and the temporary closure of all of our cinema and live theatre operations in the U.S., Australia, and New Zealand for a substantial portion of the year ended December 31, 2020, and due to the lower attendances resulting from social distancing requirements, the lack of new and compelling film product, and the reticence of customers to participate in social gatherings with third parties, Management does not currently believe that a discussion of Reading’s key performance indicators will serve as a useful metric for stockholders. Management intends to resume providing a discussion of our key performance indicators in future filings.
Industry Outlook
The COVID-19 pandemic has caused considerable economic turmoil and devastation all over the world, affecting our operations in the United States, Australia and New Zealand and has caused patrons to avoid our cinemas and retail centers and, in the United States, our live theatres or other public places where large crowds would be in attendance. The COVID-19 pandemic has caused cinemas, retail businesses and other public assembly venues to close in certain parts of the world. In response, our Company elected, on a voluntary basis, to close some of our cinemas or portions of our cinemas, while others have closed due to local government authority restrictions.
Our Company’s revenues have in 2020, and will in 2021, be pushed into later quarters, significantly reducing our full year revenues, causing decisions to be made to vary operational levels at our cinemas, and accelerating decisions to consider and implement the sale of certain non-core real estate assets as a result of (i) delayed releases of certain major motion pictures and (ii) recent announcements from certain major exhibitors collaborating with certain major studios in agreements to shorten and/or eliminate the theatrical window. The spread of COVID-19 has adversely impacted the retail businesses of our third party tenants which, in turn, has resulted in the Company entering into a number of rent relief arrangements to ensure the long-term viability of such tenants.
We have and will experience into 2021 significant impacts on our cinema exhibition and real estate businesses as several international and domestic jurisdictions continue, to varying degrees, to reinstate their lockdowns due to the volatility of COVID-19, while others have removed or loosened restrictions. These differing approaches, and the local and global affects that these may have, create an uncertainty that is expected to continue until the vaccines are administered to most of the population and the COVID-19 spread is considered materially contained.
Cinema Exhibition
The in-home and mobile segment of the entertainment industry has experienced significant leaps in recent years in both the quality and affordability of in-home entertainment systems and the accessibility to and quality of entertainment programming through alternative film distribution channels, such as network, cable, satellite, and internet distribution channels. The success of these alternative distribution channels puts additional pressure on film distributors to reduce and/or eliminate the length of time between theatrical and secondary release dates. These are issues common to both our U.S. and international cinema operations. However, the sheer quantity of programing now being offered and the multiplicity of channels through which it is being offered has increased the importance of product branding. We believe that the in-theater movie experience will become increasingly important as a way to brand and promote programming to be distributed through these alternative channels. However, we further believe that to serve this function, the in-theater experience has to be truly special. Accordingly, over the past four years, we have invested heavily in upgrading our cinemas with luxury recliner seating, large format screens, state-of-the-art sound, and enhanced food and beverage services.
Due to the COVID-19 pandemic, we have seen a tremendous rise in streaming services with greater quantity and quality of films offered. We have also seen certain major distributors skip the traditional theatrical window and go straight to streaming, PVOD or VOD. In December 2020, we launched our own streaming service in the U.S., Angelika Anywhere, which is curated for film lovers of independent and foreign film, documentaries, and the more specialized movies from the major studios. We anticipate expanding this streaming service to Australia and New Zealand in 2021.
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Additionally, while MoviePass ultimately went bankrupt, the MoviePass experiment has led to the adoption of various discount and loyalty programs in our industry. To meet this, we too have adopted a variety of discount programs as the industry adjusts to new ways of engaging with guests.
Below is a summary discussion of the competitive aspects of our cinema exhibition markets:
North America: As a result of the COVID-19 pandemic, we are currently facing strong competition in North America from alternative forms of film distribution as distributors shorten theatrical windows and/or go straight to streaming, PVOD or VOD. This is affecting major exhibitors and independent exhibitors such as ourselves. In July 2020, AMC announced partnering with Universal to shorten the theatrical window with new movies going to PVOD within three weeks of their debut instead of the typical 75 to 90-day window. In November 2020, Cinemark announced the same.Given the concentration of viewing, and the increasing amount of product being released, the impact of these shortened windows on our revenues is uncertain.
The continued growth in the demand of in-home and mobile entertainment alternatives has accelerated since the COVID-19 pandemic and is added pressure for cinema exhibitors.
Australia and New Zealand: The cinema exhibition industry in Australia and New Zealand is highly concentrated in that Event Cinemas, Village, and Hoyts (the “Major Exhibitors”) control approximately 61% of the cinema box office in Australia, while Event Cinemas and Hoyts control approximately 49% of New Zealand’s cinema box office. The industry is also somewhat vertically integrated in that one of the Major Exhibitors, Roadshow Film Distributors (part of Village), also serves as a distributor of film in Australia and New Zealand for Warner Bros. Films produced or distributed by the majority of the local international independent producers are also distributed by Roadshow. Typically, the Major Exhibitors own the newer multiplex and megaplex cinemas, while the independent exhibitors typically have older and smaller cinemas. In addition, the Major Exhibitors have built a number of new multiplexes as joint venture partners or under shared facility arrangements and have historically not engaged in head-to-head competition.
Real Estate
A summary discussion of our view as to the competitive aspects of the markets where we own real estate properties is as follows:
North America: We believe that U.S. retail real estate ownerswill continue to reuse the space vacated by anchor retailers to offer a variety of entertainment options and ultimately enhance the customer experience. The COVID effect, while significant in 2020 and 2021, will not survive in the long-term as the human need for interaction will outweigh the reduced COVID post-vaccine, risks.
Demand for office space may decline in the near term. as corporations adapt to employees’ “work-life balance” and leverage technology to automate tasks. However, our office space offering in the United States is limited. The available space in our Culver City office building is now completely leased, and our 44 Union Square office space is not generic in nature, given its Union Square location, its boutique size and brandability.
Australia and New Zealand: Over the past few years, there has been a noted stabilization in real estate market activity resulting in some increases to commercial and retail property values in Australia and to a lesser extent in New Zealand. Both countries have relatively stable economies with varying degrees of economic growth that are mostly influenced by global trends. Also, we have noted that our Australian and New Zealand developed properties have had consistent growth in rentals and values, despite the COVID effects. This is in part a product of the fact that our tenancies have focused on entertainment services (cinemas, food and beverage) and essentials (such as groceries and pharmacies), which has to some extent insulated us from internet competition. We remain optimistic that our Australian and New Zealand holdings will continue to provide value and cash flows to our operations.
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RECENT DEVELOPMENTS
Recent developments in our two business segments are discussed below:
Cinema Exhibition
Our cinema revenues consist primarily of admissions, food and beverage, advertising, gift card purchases, theater rentals, and online convenience fee revenue generated by the sale of our cinema tickets through our websites and mobile apps. Cinema operating expenses consist of the costs directly attributable to the operation of the cinemas, including film rent expense, operating costs, and occupancy costs. Cinema revenues and expenses 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 own and/or manage, please see Part I, Item 1 – Our Business of this 2020 Form 10-K.
While our capital projects in recent years have been focused on growing our real estate segment, we have also maintained our focus on improving and enhancing our cinema exhibition portfolio, as discussed below:
Cinema Additions and Enhancements
The latest additions and enhancements to our cinema portfolio over the past three years ended December 31, 2020 are as follows:
Launched 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 Cinemas in Murrieta, California (Cal Oaks) to our dine-in concept brand, “Spotlight.”
Acquisition of a well-established Cinema in Devonport, Tasmania, Australia: On January 30, 2019, we purchased the tenant’s interest and other operating assets of a well-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.
Leased a Cinema space in Lower Hutt, adjacent to Wellington, New Zealand: To mitigate the ongoing temporary closure of Reading Cinemas at Courtenay Central, we opened a three-screen cinema that trades as The Hutt Pop Up by Reading Cinemas in late June 2019.
Acquisition of a Dynamic Arthouse Cinema in Hobart, Tasmania, Australia: On December 4, 2019, we acquired the leasehold interest and other operating assets of the iconic State Cinema for $6.2 million (AU$9.0 million). This leasehold interest features 10 screens, a roof top cinema and bar, a large café, and a bookstore.
Opened a new state-of-the-art six-screen Cinema in Melbourne, Australia: On December 5, 2019, we opened a six-screen Reading Cinemas in the Burwood Brickworks shopping center offering a TITAN LUXE with DOLBY ATMOS immersive sound, enhanced food and beverage offerings, and full recliner seating in all auditoriums.
Opened a new state-of-the-art six-screen Cinema in Queensland, Australia: On December 22, 2020, we opened a six-screen Reading Cinemas at Jindalee featuring a TITAN LUXE with DOLBY ATMOS immersive sound, luxury recliner seating in all auditoriums, and newly curated enhanced food and beverage offering.
U.S. Renovations: During this period, six locations had refurbishment work performed: our Cal Oaks and Rohnert Park locations in California, our Pearlridge, Mililani and Kahala (which is not yet completed) locations in Hawaii, and our Manville location in New Jersey. Kahala renovation work commenced in late 2019 and we suspended renovations due to the COVID-19 shutdown. As of the date of this Report, we converted 94 of our 238 U.S. auditoriums to luxury recliner seating and are in the process of converting 8 auditoriums at our Consolidated Theatres at the Kahala Mall in Honolulu.
AU and NZ Renovations: During this period, we improved 14 theaters: In Australia, Charlestown, Elizabeth, Auburn, Chirnside Park, Dandenong, Harbour Town, Maitland, Rhodes, Waurn Ponds, West Lakes. And in New Zealand, Courtenay Central, Napier, Rotorua, and The Palms.
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Upgrades to our Film Exhibition Technology and Theater Amenities
Prior to COVID-19, we invested in both (i) the upgrading of our existing cinemas and (ii) the development of new cinemas to provide our customers with premium offerings, including state-of-the-art presentation (including sound, lounges, and bar service) and luxury recliner seating. As of December 31, 2020, all of the upgrades to our theater circuits’ film exhibition technology and amenities over the years are as summarized in the following table:
LocationCount ScreenCount
Screen Format
Digital (all cinemas in our theater circuit) 61 504
TITAN XC and LUXE 25 30
Dine-in Service
Gold Lounge (AU/NZ)(1) 9 24
Spotlight (U.S.)(3) 1 6
Upgraded Food & Beverage menu (U.S.)(4) 16 n/a
Premium Seating (features recliner seating) 27 167
Liquor Licenses in Use(5) 34 n/a
(1)Gold Lounge: This is our "First Class Full Dine-in Service" in our Australian and New Zealand cinemas, which includes an 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 U.S. at Reading Cinemas in Murrieta, California. Six of our 17 auditoriums at this theater feature waiter service before the movie begins with a full F&B menu, luxury recliner seating, and laser focus on customer service.
(4)Upgraded Food & Beverage Menu: Features an elevated F&B menu including a menu of locally inspired and freshly prepared items that go beyond traditional concessions, which we have worked with former Food Network executives to create. The elevated menu also includes beer, wine and/or spirits at most of our locations.
(5)Liquor Licenses: Licenses are applicable at each cinema location, rather than each theater 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. As of December 31, 2020, we have pending applications for additional liquor licenses for six theaters in the U.S.
Plans for 2021 and Our Cinema Pipeline
At the start of 2020, we continued with the renovation of our Consolidated Theatres at the Kahala Mall in Honolulu in the U.S. However, this renovation has been suspended due to the governmental restrictions imposed due to the COVID pandemic. We do not have a definitive schedule for recommencing this renovation.
By the end of 2022, we anticipate adding three new Reading Cinemas, totaling 19 screens, to our Australian cinema circuit pursuant to
Agreements to Lease: (i) Altona, VIC, (ii) Traralgon, VIC, and (iii) South City Square in Brisbane, QLD. We have an agreement with our Altona landlord in the State of Victoria to extend that cinema fit-out handover date. Based on our agreement, the potential opening date of that new cinema will likely be delayed until mid-2021. With respect to our Traralgon cinema in the State of Victoria, the landlord has been delayed in turning over the space for cinema fit-out and discussions about the tenancy and scheduling are ongoing. We anticipate that the cinema in Traralgon will open in 2021. We expect hand-over from the landlord of South City Square early in 2022, with an opening by mid-year.
Our focus with respect to new cinemas includes state-of-the-art projection and sound, luxury recliner seating, enhanced F&B (typically including alcohol service), and typically at least one major TITAN-type presentation screen. Our focus is on providing best-in-class services and amenities that will differentiate us 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 able to compete with the variety of options being offered to consumers through other platforms.
During 2021, we will continue to focus on the enhancement of our proprietary online ticketing capabilities and social media interfaces. These are intended to enhance the convenience of our offerings and to promote guest affinity with the experiences and products that we are offering. We will also be focusing on post-COVID-19 technology improvements to facilitate improved social distancing and contactless experiences. Further, expanding our online capabilities, in the third quarter of 2020, we launched the online ordering of a limited F&B menu for our Angelika brand in the U.S. and will expand to other brands during the 2021. In December 2020, we launched our very own streaming service, Angelika Anywhere, in the U.S. which is curated for film lovers of independent and foreign film, documentaries, and the more specialized movies from the major studios. We will be expanding to Australia and New Zealand in 2021.
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Cinema Closures
Temporary
As of the end of the first quarter of 2020, all of our cinemas in the United States, Australia, and New Zealand were temporarily closed in accordance with the directions and recommendations of the relevant local, state, and federal authorities relating to the COVID-19 pandemic. As the COVID-19 pandemic outbreak has been largely contained in most areas in Australia and New Zealand, and the restrictions have been reduced by local government authorities, we have reopened in those jurisdictions. As of the date of this Report, we have reopened 92% of our Australian cinema circuit and all of our New Zealand circuit with the exception of our Reading Cinemas at Courtenay Central, which remains temporarily closed due to seismic concerns. In the U.S., as of the date of this Report, we have reopened 79% of our theaters. We expect to announce reopening dates for our other cinemas in the U.S. once local government restrictions permit the opening of movie theaters and new film product is available.
In January 2019, we temporarily closed our Courtenay Central cinema in Wellington, New Zealand. This temporary closure is related to seismic concerns and is currently ongoing. While we continue to advance our planning for the center and have continued conversations with consultants, potential tenants, and city representatives, given the uncertainty surrounding the COVID-19 pandemic, we have no fixed time frame for the commencement of the redevelopment of this property.
In December 2019, we temporarily closed our Consolidated Theatres at the Kahala Mall in Honolulu for a top-to-bottom renovation, a closure that is currently ongoing. The renovation has not yet been completed and our construction has been effectively halted by the governmental restrictions imposed on us as a result of the COVID-19 pandemic. When reopened, the theatre will feature recliner seating throughout along with a state-of-the-art kitchen and an elevated F&B menu.
Some of our cinemas have encountered new competition, and we believe that others will benefit from planned refurbishment and upgrading. The scope, extent, and timing of such refurbishment and upgrading will be necessarily impacted by our need to preserve capital and liquidity while we work through the various challenges posed by the ongoing COVID-19 pandemic.
Real Estate
As of December 31, 2020, our operating properties consisted of the following:
Newmarket Village (Brisbane area, QLD), Cannon Park (Townsville, QLD), The Belmont Common (Perth area, WA), Auburn Redyard (Sydney area, NSW), and Courtenay Central (Wellington area, NZ);
two single-auditorium live theatres in Manhattan (Minetta Lane and Orpheum) and a four-auditorium live theatre complex, including the accompanying ancillary retail and commercial tenant, in Chicago (The Royal George);
our worldwide headquarters’ building in Culver City, California and our Australian corporate office building in Melbourne, Australia; and,
the ancillary retail and commercial tenants at some of our non-ETC cinema properties.
At the start of the spread of the COVID-19 pandemic, varied trading restrictions, some enforced by the government, affected many of our tenants at our ETC’s in Australia and New Zealand. Although there were varied trading restrictions, most of these properties remained open for business through the COVID-19 crisis. As of the date of this Report, the majority of our tenants are currently open for business at our Australian and New Zealand properties with continued health and safety measures in place. Most of the rentable retail portions of our Courtenay Central location in New Zealand continue to be closed since January 2019 due to seismic concerns, however, two tenants remain open and are trading as of the date of this Report.
In addition, as of December 31, 2020, we had various parcels of unimproved real estate held for sale in Manukau, New Zealand and Coachella, California, various unimproved real estate held development in connection with existing ETCs in Australia and New Zealand, and properties (located principally in Pennsylvania) used in our legacy activities.
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Our key real estate transactions over the past three years ended December 31, 2020 were as follows:
Strategic Acquisitions
Purchase of Land in Townsville, Australia – On June 13, 2018, we acquired a 163,000 square foot parcel at our Cannon Park ETC, in connection with the restructuring of our relationship with the adjacent landowner. Prior to the restructuring, this parcel was commonly owned by us and the adjoining landowner. In the restructuring, the adjoining landowner conveyed to us their interest in the parcel for AU$1. In return, we granted the adjoining landowner certain access rights.
Purchase of Property in Auburn, Australia– On June 28, 2018, we added 21,000 square feet of land, improved with a 17,000 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. With this acquisition, Auburn Redyard now represents approximately 519,000 square feet of land, with approximately 2,000 feet of uninterrupted frontage to Parramatta Road, a major Sydney arterial motorway. This asset was listed for sale in January 2021.
Exercise of Option to Acquire Ground Lessee’s interest in Ground Lease and Improvements Constituting the Village East Cinema – On August 28, 2019, we exercised our option to acquire the ground lessee’s interest in the ground lease underlying and the real property assets constituting our Village East Cinema in Manhattan. The purchase price under the option is $5.9 million. It was initially agreed that the transaction would close on or about May 31, 2021. On March 29, 2021, we extended this closing date to January 1, 2023. As the transaction is a related party transaction, it was reviewed and approved by our Board’s Audit and Conflicts Committee and supported by a third-party valuation, which showed substantial value in the option and, upon closing, will result in an annual rent savings of $590,000.
Strategic Asset Sales
United States:
Sale of Landholding in Coachella, California – This non-income producing land was sold on March 5, 2021 for $11.0 million, and our share was approximately $5.5 million.
New Zealand:
Sale of Landholding in Manukau/Wiri, New Zealand – This non-income producing land was sold on March 4, 2021 for NZ$77.2 million (US$56.1 million).
Value-creating Opportunities
The implementation of most of our real estate development plans have been delayed due to COVID-19 and the need to conserve capital. However, we continue to believe that our Company’s strong real estate asset base will provide (i) increased financial security through the potential sale of certain non-core real estate assets or (ii) provide collateral for strategic re-financing, in each case to meet liquidity demands. We intend to continue to emphasize the prudent development of our real estate assets.
United States:
Sepulveda Office Building (Culver City, U.S.)–On May 27, 2020, we leased on a multi-year basis the entire second floor of our headquarter building in Culver City, California (approximately 12,000 usable square feet) to WWP Beauty (wwpinc.com), a global company with over 35 years of experience providing the cosmetics and personal care industries with a range of packaging needs. On the date of the lease, possession of the space was turned over to WWP Beauty, which is responsible for building out its space. During the second quarter of 2020, rent commenced on a straight-line basis. Tenant improvements commenced in January 2021 and should be completed by April 2021.
44 Union Square Redevelopment (New York City, U.S.) – Historically known as Tammany Hall, this building with approximately 73,000 square feet of net rentable area overlooks Manhattan’s Union Square. During the COVID-19 pandemic, New York City shutdown non-essential construction and business, including construction work at our site. However, the construction of the improvements necessary to obtain a core and shell temporary certificate of occupancy were substantially completed prior to the shutdown. On July 1, 2020, the site reopened for construction activities, and on August 31, 2020, we received a temporary certificate of occupancy for the core and shell of the building.
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Our leasing team continues to pursue potential tenants. This building, hailed as a dramatic pièce de résistance with its first in the city, over 800-piece glass dome, brings the future to New York’s fabled past and was awarded in 2020 the ENR New York’s Best Projects awards for Renovation/Restoration and for Safety. We believe 44 Union Square is attractive to potential tenants interested in both (i) operating in New York City and (ii) seeking to have greater control over the size and design of their spaces in a post-COVID-19 environment. It is one of a very limited number of “brandable” sites available for lease in New York City and can be delivered immediately upon the execution of leases.
Minetta Lane Theatre (New York City, U.S.) – Prior to COVID-19, our theatre was used by Audible, a subsidiary of Amazon, to present plays featuring a limited cast of one or two characters and special live performance engagements, which it recorded and made available to the public through the Audible streaming service. Due to COVID-19, no shows have been presented since March 2020 and the theatre remains closed to the public until further instruction from local government authorities. In late 2019, we completed an initial feasibility study for the potential redevelopment of this asset. We will refocus our efforts on this project at a later date when New York City begins to show signs of recovery from the impacts of the COVID-19 pandemic. In the interim, we will continue our license arrangement with Audible.
Cinemas 1,2,3 Redevelopment (New York City, U.S.) – Given the closure of our two cinemas in New York City’s Upper East Side, we have determined to continue to operate this location as a cinema for at least the near term. We are pursuing a rezoning of this property so as to allow us to continue our cinema use as a part of any such redevelopment. However, all other redevelopment activity related to this location has been suspended, until we are able to develop a better understanding of the ongoing effects of COVID-19 on our assets and the market.
Australia:
Expansion Project for Newmarket Village located in an affluent suburb of Brisbane, Australia – In November 2015, we acquired a separate parcel adjacent to our tenant, Coles supermarket. This property is currently improved with an office building, which is now fully leased. These leases have early development provisions allowing us to terminate these arrangements in connection with a redevelopment of the property. We intend to ultimately demolish this office building and to integrate this parcel into Newmarket Village. Newmarket Village is approximately 98% leased.
New Zealand:
Courtenay Central Redevelopment (Wellington, New Zealand) – Located in the heart of Wellington – New Zealand’s capital city – our Courtenay Central property covers, on a consolidated basis through various subsidiaries, 161,071 square feet of land situated proximate to (i) the Te Papa Tongarewa Museum (attracting over 1.5 million visitors annually, pre-COVID), and (ii) across the street from the site of the future Wellington Convention and Exhibition Centre (wcec.co.nz), the capital’s first premium conference and exhibition space, which is due to be completed in 2023. Despite the COVID-19 pandemic, construction for this major public project has resumed and plans include the creation of a public concourse linking through to Wakefield Street, which is across the street from our Courtenay Central project.
As previously reported, damage from the 2016 Kaikoura earthquake necessitated demolition of our nine-story parking garage at the site, and unrelated seismic issues caused us to close major portions of the existing cinema and retail structure in early 2019. Prior to the COVID-19 pandemic, the real estate team had developed a comprehensive plan featuring a variety of uses to complement and build upon the “destination quality” of the Courtenay Central location. Notwithstanding the COVID-19 pandemic, our real estate team is continuing to work with our consultants, potential tenants, and city representatives to advance our redevelopment plans for this property.
For a complete list and further details of our value-creating projects, see Part I, Item 2 – Properties under the heading “Investment and Development Property.”
Corporate Matters
Stock Repurchase Program – On March 10, 2020, our Board of Directors authorized a $25.0 million increase to our 2017 stock repurchase program, bringing our total authorized repurchase amount remaining to $26.0 million, and extended the program to March 2, 2022. Through December 31, 2020, we have repurchased 1,792,819 shares of Class A Non-Voting Common Stock at an average price of $13.39 per share (excluding transaction costs). Of these, 75,157 shares were purchased during the year ended December 31, 2020, at an average price of $8.92 per share.
Due to the COVID-19 pandemic and its impact on our overall liquidity, our stock repurchase program has and will likely continue to take a lower capital allocation priority for the foreseeable future.
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Board Compensation and Stock Options Committee – Our Compensation and Stock Options Committee, in early 2020, determined to pay out no cash bonuses, with respect to 2019, to any Company senior executives, including our CEO. Following the expiration of the Reading International, Inc. 2010 Stock Incentive Plan (as amended, the "2010 Plan"), our Board of Directors adopted the Reading International, Inc. 2020 Stock Incentive Plan (the “2020 Plan”), which was approved by our stockholders on December 8, 2020. The aggregate total number of shares of Common Stock authorized for issuance under the 2020 Plan was 1,250,000 shares of Class A Stock and 200,000 shares of Class B Stock. In addition, if any awards that were outstanding under the 2010 Plan are subsequently forfeited or if the related shares are repurchased, a corresponding number of shares will automatically become available for issuance under the 2020 Plan, resulting in an increase in the number of shares available for issuance under the 2020 Plan (up to an additional 1,024,902 shares of Class A Stock). On December 16, 2020, the Board of Directors issued 60,084 non-employee director RSUs and 38,803 option shares to various Board members following the Annual Meeting of Stockholders. On December 14, 2020 and December 16, 2020, the Board and the Compensation Committee issued 54,719 RSUs to various members of the management team and other key employees of the Company in recognition of their service during 2020, which was a challenging year due to the COVID-19 pandemic.
Our Financing Strategy
Prior to the interruptions to our revenues caused by the COVID-19 pandemic, we have used cash generated from operations and other excess cash to the extent not needed to fund capital investments contemplated by our business plan, to pay down our loans and credit facilities. This has provided us with availability under our available loan facilities for future use and thereby, reduced interest charges. On a periodic basis, we have reviewed the maturities of our borrowing arrangements and negotiated renewals and extensions where necessary in the current circumstances. We completed amending and extending various financing arrangements less than two weeks prior to the COVID-19 government mandated shutdowns, which we believe has helped provide the necessary liquidity to see us through the COVID-19 crisis.
In response to the COVID-19 pandemic, the temporary closure of our theaters, and the trading restrictions placed on many of our real estate tenants at our ETCs, we had fully drawn-down on all our available operating lines-of-credit by the end of the first quarter of 2020, to provide future liquidity by the end of the first quarter of 2020. As of December 31, 2020, we had $3.8 million available on our U.S. Credit Facility and have the ability to redraw these funds as Management sees fit as long as the current required liquidity tests continue to be met.
For more information about our liquidity and financing strategy, please refer to Note 3 – Impact of COVID-19 Pandemic and Liquidity to the Consolidated Financial Statements included herein in Part II, Item 8 (Financial Statements and Supplementary Data) on this report.
Bank of America Loan
On March 6, 2020, we (i) entered into an amendment for our $55.0 million credit facility with Bank of America, which supports our U.S. Cinema operations, extending the maturity date to March 6, 2023 and implementing an interest rate of 2.5% - 3.0% dependent on certain financial ratios plus a variable rate and (ii) also extending the term of our $5.0 million line of credit with Bank of America to March 6, 2023.
On August 7, 2020, we entered into a Waiver and Second Amendment to the Second Amended and Restated Credit Agreement (“Amendment”) modifying certain financial covenants within this credit facility and temporarily suspended the testing of certain other covenant tests through measurement period ending September 30, 2021. The testing of the financial covenant resumes for measurement period ending December 31, 2021. The modifications also include new covenants related to maintenance of certain liquidity levels. Under the Amendment, cash balances in excess of $3.0 million will be used to paydown the facility debt. However, this is not a reduction in that credit facility and, subject to the satisfaction of draw down requirements, will be available for re-borrowing. In addition to the covenant modifications, the interest rate on borrowings under this facility was fixed at 3.0% above the “Eurodollar” rate, which itself now has a floor of 1.0%. As of December 31, 2020, we had $3.8 million available under this credit facility. In regard to the line of credit, we also modified the interest rate, wherein the LIBOR portion of the rate now has a floor of 1.0%. Such modifications were not considered to be substantial under U.S. GAAP.
Cinemas 1,2,3 Term Loan
On March 13, 2020, Sutton Hill Properties LLC, our 75% subsidiary, increased its term loan with Valley National Bank to $25.0 million from $20.0 million, with an interest rate based on the greater of (i) the two-year U.S. Treasury Rate plus 2.5% or (ii) 4.25%. The current interest rate used for the Valley National loan is 4.25%. This loan matures on April 1, 2022 with two six-month options to extend through April 1, 2023.
NAB Corporate Term Loan (AU)
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Prior to COVID-19, in March 2019, we amended our Revolving Corporate Markets Loan Facility with NAB from a facility comprised of (i) a AU$66.5 million loan facility with an interest rate of 0.95% above the 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 (i) a AU$120.0 million Corporate Loan facility at a rate of 0.85% - 1.3% 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 debt modifications of this particular term loan were not considered to be substantial under U.S. GAAP.
On August 6, 2020, we modified certain covenants within this Revolving Corporate Markets Loan Facility with NAB (the “NAB Amendment”). These modifications apply until the quarter ended June 30, 2021. In addition, for the period in which these covenant modifications apply, the interest rate on amounts borrowed under the facility is 1.75%. The NAB Amendment modifies the Fixed Charge Cover Ratio testing for the quarters through June 30, 2021 so that ratio testing is calculated on each respective quarter’s trading performance, as opposed to annually and waives the leverage ratio testing through the quarter ended June 30, 2021. Such a modification was not considered to be substantial under U.S. GAAP.
On December 29, 2020, to fund the completion of our recently opened cinema in Jindalee, Queensland, we increased the core portion of our Revolving Corporate Markets Loan Facility by AU$3.0 million, and is repayable in installments by October 31, 2023. This amendment increases the Facility Limit to AU$123.0 million, which will be reduced back to AU$120.0 million as the Jindalee funding is repaid. We further modified certain covenants within this Revolving Corporate Markets Loan Facility with NAB. We further modified certain covenants within this Revolving Corporate Markets Loan Facility with NAB. The Fixed Charge Cover Ratio testing periods were further modified through the quarter ended September 30, 2021. The Leverage ratio was also modified through quarter ended June 30, 2022.
Westpac Bank Corporate Credit Facility (NZ)
On December 20, 2018, we restructured our Westpac Corporate Credit Facilities. The maturity of the 1st 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.
On June 29, 2020, Westpac pushed out the June 30, 2020 covenant testing date to July 31, 2020. On July 27, 2020, Westpac waived the requirement to test certain covenants as of July 31, 2020. This agreement also increased the interest rate and line of credit charge to 2.40% above the Bank Bill Bid Rate and 1.65%, respectively. The maturity date was extended to January 1, 2024. Such modifications of this facility were not considered to be substantial under U.S. GAAP. On December 8, 2020, Westpac waived the requirement to test certain covenants as of December 31, 2020.
Union Square Financing
44 Union Square, our property in Manhattan with 73,000 net rentable square foot of retail and office space, received a temporary certificate of occupancy for the core and shell of the building on August 31, 2020 and is in the lease-up phase with construction being complete (except for minor punch list items). Total debt against the property aggregates to $40.6 million. On January 24, 2020, we exercised a one-year extension options on the Bank OZK (formerly Bank of the Ozarks) loan, taking the maturity to December 29, 2020. On December 29, 2020, we further extended the maturity of this loan to March 31, 2021, at an interest rate of 17.5% and on March 26, 2021, we repaid this loan in full. We are currently working on a refinancing of the property and, while no assurances can be given, based on current facts and circumstances, we anticipate that the refinancing, which will free up substantial capital, can be finalized in the second quarter of 2021.
For more information about our refinancing, please refer to Note 3 – Impact of COVID-19 Pandemic and Liquidity to the Consolidated Financial Statements included herein in Part II, Item 8 (Financial Statements and Supplementary Data) on this report.
Refer to Note 11 – Borrowings for additional information.
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OVERALL RESULTS OF OPERATIONS
In this section, we discuss the results of our operations for the year ended December 31, 2020 compared to the year ended December 31, 2019. For a discussion of the year ended December 31, 2019 compared to the year ended December 31, 2018, please refer to Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2019.
At December 31, 2020, we leased or owned and operated 61 cinemas with 504 screens, which includes our interests in certain unconsolidated joint ventures that total three cinemas with 29 screens. In addition, we:
opened a new state-of-the-art six-screen Reading Cinemas in Jindalee, a suburb of Queensland, Australia in the fourth quarter of 2020;
expanded into Tasmania acquiring a four-screen cinema in Devonport in the first quarter and a ten-screen cinema (the State Cinema) in Hobart in the fourth quarter of 2019;
opened a three-screen pop-up in Lower Hutt located in the greater region of Wellington, New Zealand at the end of June 2019;
ended our management agreement related to the 86th Street Cinema in New York City due to the expiration of the underlying lease and closed our historically profitable Paris and Beekman theatres in New York City due to lease expirations;
launched our six-screen Reading Cinemas in Burwood, a suburb of Melbourne, Australia, in December 2019;
owned and operated five ETCs located in Newmarket Village (a suburb of Brisbane), Belmont (a suburb of Perth), Auburn Redyard (a suburb of Sydney) and Cannon Park (in Townsville) in Australia, and Courtenay Central (in Wellington) in New Zealand;
owned and operated our headquarters’ office buildings in Culver City (an emerging high-tech and communications hub in Los Angeles County) and, during the second quarter 2020, entered a multi-year lease with a corporate tenant for the entire second floor. We are currently in the tenant improvement phase and began receiving rental payments in October 2020;
owned and operated our headquarters’ office building in Melbourne, Australia;
owned and operated the fee interests in three developed commercial properties in Manhattan and Chicago improved with live theatres comprising six stages and ancillary retail and commercial space;
owned a 75% managing member interest in a limited liability company which in turn owns the fee interest in Cinemas 1,2,3;
owned our Union Square development property with approximately 73,000 square feet of net leasable area comprised of retail and office space. The 44 Union Square is currently in the leasing phase, and we received a temporary certificate of occupancy with respect to the core and shell work on August 31, 2020;
owned 197-acres principally in Pennsylvania from our legacy railroad business, including the Reading Viaduct in downtown Philadelphia.
Our Company transacts business in Australia and New Zealand and is subject to risks associated with changing foreign currency exchange rates. During the current year, the Australian dollar and New Zealand dollar weakened against the U.S. dollar by 0.7% and 1.4%, respectively, compared to the prior year.
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The following table sets forth the overall results of operations for the three years ended December 31, 2020:
% Change - Favorable/(Unfavorable)
SEGMENT RESULTS
NON-SEGMENT RESULTS
Gain (loss) on sale of assets (1) — % (2) (0) % (41) — % 50 % 95 %
(1)See Note 2 of the 2020 10-K for the prior period adjustments for accounting for accrued sales tax accounts deemed not material.
CONSOLIDATED RESULTS
2020 vs. 2019
Net income attributable to RDI common stockholders decreased by $38.8 million to a loss of $65.2 million. This decrease was due to:
(i)a $68.4 million decrease in Cinema Exhibition segment operating income mainly attributable to the ongoing temporary closure of some of our cinemas, reduced seating occupancy as a result of social distancing measures, and the changes to the release schedule by film distributors, which collectively led to a significant drop in attendance since March 2020;
(ii)a $7.6 million decrease in the Real Estate segment operating income, due to the ongoing temporary closures of our U.S. Live Theatres, the absence of internal rent revenue from some of our fee-interest cinemas, and the rent abatements provided to our third-party tenants as a result of the COVID-19 pandemic;
(iii)a $1.5 million increase in interest expense attributable to the termination of the capitalization of interest on Union Square and the renegotiation of our bank covenants due to the COVID-19 pandemic; and
The decreases were offset by a $33.8 million decrease in income tax expense to a benefit of $5.0 million, mainly due to the pretax loss in 2020 and a tax benefit as a result of the CARES Act, partially offset by the recording of a valuation allowance on U.S. deferred tax assets, and by a $6.1 million decrease in general and administrative expenses.
BUSINESS SEGMENT RESULTS – 2020 vs. 2019
Presented below is the comparison of the segment operating income of our two business segments for the years ended December 31, 2020 and 2019, respectively:
2020 2019 % Change Favorable/(Unfavorable)
(Dollars in thousands) Cinema Real Estate Cinema Real Estate Cinema Real Estate
Segment Operating Expenses
Impairment of long-lived assets (217) — — — (>100) % — %
Breakdown by country:
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A discussion for each segment follows:
Cinema Exhibition – The following table details our Cinema Exhibition segment operating results for the years ended
December 31, 2020 and 2019, respectively:
REVENUE
Advertising and other revenue 442 6 % 993 5 % (55) %
OPERATING EXPENSE
Australia Film rent and advertising cost $ (8,605) (26) % $ (28,364) (30) % 70 %
DEPRECIATION, AMORTIZATION, IMPAIRMENT AND GENERAL AND ADMINISTRATIVE EXPENSE
Impairment of long-lived assets (217) (1) % — — (>100) %
General and administrative expense (2,486) (9) % (2,747) (2) % 10 %
Australia Depreciation and amortization $ (5,762) (18) % $ (4,946) (5) % (16) %
General and administrative expense (950) (3) % (1,638) (2) % 42 %
New Zealand Depreciation and amortization $ (1,423) (20) % $ (1,479) (7) % 4 %
General and administrative expense 9 — % (159) (1) % >100 %
OPERATING INCOME (LOSS)
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Cinema Exhibition – The following table details our Cinema Exhibition segment operating results for the quarters ended December 31, 2020 and 2019, respectively:
REVENUE
Advertising and other revenue 118 7 % 236 5 % (50) %
OPERATING EXPENSE
Australia Film rent and advertising cost $ (1,877) (25) % $ (6,600) (30) % 72 %
New Zealand Film rent and advertising cost $ (463) (27) % $ (1,521) (30) % 70 %
DEPRECIATION, AMORTIZATION, IMPAIRMENT AND GENERAL AND ADMINISTRATIVE EXPENSE
Impairment of long-lived assets (217) (8) % — — % — %
General and administrative expense (258) (9) % (1,231) (4) % 79 %
Australia Depreciation and amortization $ (1,413) (19) % $ (1,316) (6) % (7) %
General and administrative expense (96) (1) % (400) (2) % 76 %
New Zealand Depreciation and amortization $ (333) (19) % $ (380) (8) % 12 %
General and administrative expense 1 — % (59) (1) % >100 %
OPERATING INCOME (LOSS)
Cinema Exhibition Segment Operating Income
Cinema Exhibition segment operating income decreased by $68.4 million, to a loss of $45.1 million for the year ended December 31, 2020 compared to December 31, 2019, primarily driven by the repercussions caused by the COVID-19 pandemic, such as the (i) continued temporary closure of some of our cinemas, (ii) reduced capacity as a result of social distancing measures, and (iii) delays in release schedules by film distributors, which collectively led to a significant drop in attendance and a reduction in revenue by 74%, or $195.2 million. This was further impacted by the ongoing temporary closure of Reading Cinemas at Courtenay Central in New Zealand. This decrease is partially mitigated by (i) the reopening of a portion of our cinemas worldwide during the last three quarters of 2020, (ii) the absence of internal rent expense from some of our fee-interest cinemas due to the COVID-19 pandemic, and (iii) rent abatements received from a number of our landlords.
Measured in local currencies, these decreases were slightly lower, as reported results were dampened further by the weakening of the Australian and New Zealand dollars compared to the U.S. dollar in 2020.
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Cinema Exhibition segment operating income for the quarter ended December 31, 2020 decreased by $17.4 million, to a loss of $11.7 million compared to the quarter ended December 31, 2019, primarily driven by the continued temporary closure of a portion of our cinemas due to COVID-19 and the lack of film product with releases being pushed into later years. This decrease was reduced by the absence of internal rent expense from some of our fee-interest cinemas and the rent abatements from a number of our landlords.
Measured in local currencies, these decreases were slightly higher, as reported results were reduced further by the strengthening of the Australian and New Zealand dollars compared to the U.S. dollar in the fourth quarter of 2020.
Revenue
Cinema revenue decreased by 74%, or $195.2 million, to $67.0 million for the year ended December 31, 2020 compared to 2019.
The table below is the revenue breakdown, by country, for the years ended December 31, 2020 and 2019, respectively:
Below are the changes in our cinema revenue by market:
United States
Cinema revenues decreased by 81%, or $120.2 million, to $27.4 million for the year ended December 31, 2020 compared to 2019. This decrease was primarily due to the ongoing temporary closures of most of our U.S. Cinemas and the social distancing measures put in place as a result of the COVID-19 pandemic, the lack of a consistent and compelling movie slate from the major studios, and the ongoing temporary closure in December of 2019 of our Consolidated Theatre at the Kahala Mall in Honolulu for a top-to-bottom renovation.
Australia
Cinema revenues decreased by 65%, or $61.0 million, to $32.5 million for the year ended December 31, 2020 compared to 2019. This decrease was largely due to the temporary closures of our cinemas in Australia as a result of the COVID-19 pandemic, the postponement or removal from the release schedule of major motion pictures, and the weakening of the Australian dollar when compared to the U.S. dollar, partially offset by the reopening of all of our Australian cinemas by November 2020.
New Zealand
Cinema revenues decreased by 66%, or $14.0 million, to $7.1 million for the year ended December 31, 2020 compared to 2019. This decrease was mainly due to the temporary closures of some of our cinemas in New Zealand as a result of the COVID-19 pandemic, the lack of a slate of motion pictures from the major studios, and the weakening of the New Zealand dollar when compared to the U.S. dollar, partially offset by the reopening of our cinemas in New Zealand in June of 2020, excluding Courtenay Central, which remains closed due to seismic concerns.
For the quarter ended December 31, 2020, Cinema segment revenues decreased 81%, or $53.2 million, to $12.1 million compared to the same quarter in 2019. This was driven by the decline in admissions in all three circuits due to the ongoing temporary closures of some of our cinemas as a result of the COVID-19 pandemic further impacted by the continued temporary closure of our Reading Cinemas at Courtenay Central and the ongoing temporary closure of Consolidated Theatres Kahala for renovation, slightly offset by the launch of our Reading Cinemas at Jindalee in Australia at the end of 2020. These results were offset by the strengthening of the Australian and New Zealand dollars in the fourth quarter of 2020.
Operating Expense
Operating expensefor 2020 decreased by 57%, or $124.2 million, to $93.2 million when compared to 2019 due to a decline in film rent expense as a result of cinemas being closed and lack of new films, and savings in internal and external rent abatements received in 2020 as a result of the COVID-19 pandemic. Furthermore, the temporary closures of our cinemas ultimately led to employee terminations in late March in the U.S. resulting in a reduction in labor costs. Conversely, in Australia and New Zealand, there was no need to terminate employees as we enjoyed the benefits of wage subsidies provided by their respective governments, which covered virtually all of the costs of our cinema level personnel. The wage subsidy program in Australia was reduced at the beginning of 2021 and continued to cover a substantial proportion of the costs however, this program ended on March 27, 2021. The wage subsidy program in New Zealand ended on August 25, 2020.
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For the quarter ended December 31, 2020, operating expense decreased by 64%, or $34.1 million, to $19.5 million compared to December 31, 2019, primarily due to lower film rent expense as a result of cinemas being closed and lack of new films, savings in labor costs, and in some cases, lower F&B costs as a result of a drop in admissions in 2020.
Depreciation, Amortization, General and Administrative Expense
Depreciation, amortization, general and administrative expense for 2020 cinema operations decreased by 12%, or $2.6 million, to $18.9 million compared to 2019 primarily driven by reduction in depreciation expense for our U.S. cinemas digital projectors, which were substantially depreciated by the end of 2019. The decrease was partially offset by increases in depreciation expense related to the completion of our 44 Union Square capital improvements placed into service along with the foreign exchange movements in Australia and New Zealand, and a $0.2 million impairment charge incurred against certain cinema assets.
Depreciation, amortization, general and administrative expense for the quarter ended December 31, 2020 decreased by 28%, or $1.7 million, to $4.4 million primarily from the savings in payroll costs as a result of the wage subsidy programs and reduction in corporate staff costs.
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Real Estate – The following table details our Real Estate segment operating results for the years ended December 31, 2020 and 2019, respectively:
REVENUE
OPERATING EXPENSE
United States Live theatre cost $ (698) (49) % $ (1,271) (33) % 45 %
DEPRECIATION, AMORTIZATION, GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense (487) (34) % (588) (15) % 17 %
Australia Depreciation and amortization $ (3,634) (34) % $ (3,622) (23) % — %
General and administrative expense (275) (3) % (1,127) (7) % 76 %
New Zealand Depreciation and amortization $ (945) (98) % $ (992) (41) % 5 %
General and administrative expense 14 0 % (204) (8) % >100 %
OPERATING INCOME (LOSS)
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Real Estate – The following table details our Real Estate segment operating results for the quarters ended December 31, 2020 and 2019, respectively:
REVENUE
OPERATING EXPENSE
United States Live theatre cost $ (86) (33) % $ (351) (36) % 75 %
Australia Property cost $ (724) (29) % $ (703) (19) % (3) %
DEPRECIATION, AMORTIZATION, GENERAL AND ADMINISTRATIVE EXPENSE
Australia Depreciation and amortization $ (1,001) (40) % $ (893) (24) % (12) %
General and administrative expense 154 6 % (267) (7) % >100 %
New Zealand Depreciation and amortization $ (242) (96) % $ (244) (39) % 1 %
General and administrative expense (9) (4) % (87) (14) % 90 %
OPERATING INCOME (LOSS)
Real Estate Segment Operating Income
Real Estatesegment operating income decreased by $7.6 million, to a loss of $2.5 million for the year ended December 31, 2020 compared to 2019. This decrease is attributable to the ongoing temporary closures of our U.S. Live Theatres, the absence of internal rent revenue from some of our fee-interest cinemas, and the rent abatements provided to our third-party tenants as a result of the COVID-19 pandemic.
Real Estate segment operating income decreased by $2.2 million, to a loss of $1.0 million for the quarter ended December 31, 2020 compared to 2019, primarily due to the ongoing temporary closures of our U.S. Live Theatres, the absence of intercompany rent revenue from some of our fee-interest cinemas, and rent abatements provided to tenants as a result of the COVID-19 pandemic.
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Revenue
The table below is the revenue breakdown by country for each year:
Real estate revenues for the year ended December 31, 2020 decreased by 41% or $8.9 million, to $13.0 million compared to 2019. This decrease is attributable to the ongoing temporary closures of our U.S. Live Theatres and the issuance of rent abatements to certain third-party Australian tenants. The decrease was further impacted by the vacating of a tenant at our Courtenay Central site in March 2020 and the decision by our Real Estate division to abate intercompany rent payable by Reading Cinemas as anchor tenants at some of our ETCs in response to the closures and revenue reductions caused by COVID-19.
Referring to our Australian real estate revenue, a federal government Code of Conduct was prepared at the end of the first quarter of 2020 intended to function as guidance for landlords and tenants when negotiating rent relief. Initially this Code of Conduct was taken to be ‘best practice,’ but during the second quarter of 2020, state governments signed into law their own rent relief legislation which, to varying degrees, drew upon the Code of Conduct as well as incorporated other legislative requirements at a state’s own discretion. Consistent across the Australian states is legislation regarding the measurement of rent relief by way of abatement and is measured against declines in sales volumes over the period in which a tenant is impacted by COVID-19.
For the quarter ended December 31, 2020, Real Estate revenue decreased by 44%, or $2.3 million, to $3.0 million compared to 2019. primarily due to the ongoing pandemic which resulted in the temporary closure of our U.S. Live Theatres and the rent abatements provided to our third-party tenants as a result of the COVID-19 pandemic. These results were partially offset by the strengthening foreign currency exchange rate in the Australian and New Zealand dollars.
Operating Expense
Operating expense for the year ended December 31, 2020 decreased by 9%, or $0.9 million, to $8.6 million when compared to the same period in 2019 mainly driven by (i) the ongoing temporary closures of our Live Theatre business unit and (ii) a rent abatement obtained from a ground lessor in Australia. Throughout the fourth quarter of 2020, many operating expenses were significantly reduced, and various projects and maintenance works were postponed. In addition, our operating expenses were reduced as we brought in-house certain property management functions that were earlier outsourced. In Australia, various State Revenue Offices (SRO) implemented support measures for commercial landlords whereby land tax relief was provided, and continues to provide, by way of a percentage of land tax waiver or deferral. Further, this decrease was offset by increased legal expenses for our property development work.
For the quarter ended December 31, 2020, operating expenses remained flat with a slight decrease of 1%, to $2.3 million when compared to the same period in 2019 due to our inability to lower fixed expenses even with declining revenues, offset by increased costs related to our 44 Union Square property being included in operating costs.
Depreciation, Amortization, General and Administrative Expense
Depreciation, amortization, general and administrative expenses for 2020 decreased by 6%, to $6.8 million when compared to the same period in 2019 driven by general and administrative expense reductions in Australia, while depreciation remained flat.
For the quarter ended December 31, 2020, depreciation, amortization, and general, and administrative expenses decreased by 9%, or $0.2 million, to $1.7 million compared to the quarter ended December 31, 2019 due to the capitalization of our 44 Union Square property.
NON-SEGMENT RESULTS –2020 vs. 2019
General and Administrative Expense
Non-segment general and administrative expense for the year ended December 31, 2020 decreased by 32%, or $6.1 million, to $12.8 million compared to the same period in the prior year, mainly attributed to (i) savings in payroll costs as a result of the wage subsidy programs and reduction in corporate staff, (ii) reduced costs related to corporate airfare and travel as a result of COVID-19 restrictions, and (iii) decreases in professional and legal services. The decrease was further favorably impacted by the affirmation on appeal by the Nevada Supreme Court of a $0.8 million costs judgment entered in favor of our Company in the James J. Cotter Jr. derivative litigation.
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For more information about the legal expense, please refer to Note 13 – Commitments and Contingencies to the Consolidated Financial Statements included herein in Part II, Item 8 (Financial Statements and Supplementary Data) on this report.
Income Tax Benefit
The U.S. Coronavirus Aid, Relief, and Economic Security Act (“the CARES Act”) was enacted on March 27, 2020 to provide tax relief to companies impacted by the COVID-19 pandemic. The CARES Act includes, among other items, provisions for net operating loss carryback, modifications to the business interest expense deduction, a technical correction to tax depreciation methods for qualified improvement property, and alternative minimum tax credit refunds. During the quarter ended March 31, 2020, we recorded a tax benefit arising from the carryback of the net operating loss generated in the taxable year ended December 31, 2019.
Income tax expense decreased by $33.8 million, to a benefit of $5.0 million, when compared to 2019, mainly due to the pretax loss in 2020 and a tax benefit as a result of the CARES Act. This was partially offset by the recording of valuation allowance on U.S. deferred tax assets. Please refer to Note 10 – Income Taxes of the Notes to Consolidated Financial Statements in Part II of this Annual Report for further information.
Interest Expense, Net
Interest expense (net of interest income) increased by 18%, or $1.5 million, to $9.4 million, mainly due to an increase in our borrowings as a result of the COVID-19 pandemic and the termination of the capitalization of interest on 44 Union Square.
LIQUIDITY AND CAPITAL RESOURCES
The COVID-19 outbreak has materially adversely affected the economies (and the cinema exhibition industry in particular) of the United States, Australia, and New Zealand. Outbreaks of COVID-19 caused cinemas and other public assembly venues to close in March of 2020. Major studios have announced the delayed release of major motion pictures into 2021 and beyond or have gone straight to streaming. Consequently, the delayed releases of major motion pictures and the elimination of the theatrical window by some studios has and will push revenues into later quarters, thereby reducing our full year revenues, and may accelerate our decisions to consider more permanent reductions of operational levels at our cinemas. However, even if such film product is forthcoming, operating revenues may continue to be adversely impacted by ongoing governmental restrictions, social distancing requirements, the adoption and implementation of new sanitization protocols, and potential hesitancy of patrons to return to public indoor venues.
With respect to our home office employees, our Company’s home offices in Culver City, CA and New York City, NY, remain closed as of the date of filing of this Report, with employees continuing to work remotely. Our employees in our Melbourne, Australia office are back at the office full time. With regard to our office in Wellington, New Zealand, our temporary office space lease expired, and our staff continue to work remotely for the time being.
In response to uncertainties associated with the outbreak of the COVID-19 pandemic and its impact on our Company’s business, Management drew down the available operating borrowing capacity in the first quarter of 2020 and continued to maintain those borrowing levels through the second quarter. During the third quarter of 2020, we paid down $5.8 million on the Bank of America revolving credit facility as part of our expense reduction, in this case interest expense. We subsequently borrowed $2.0 million on this line in the fourth quarter of 2020, therefore $3.8 million was available at December 31, 2020. These funds are, however, available to be drawn under this facility. Total outstanding borrowings were $285.0 million at December 31, 2020. As of December 31, 2020, we had $26.8 million in cash and cash equivalents. Our Company’s use of these funds is in some ways limited due to limitations on the expatriation of funds from Australia and New Zealand to the United States and limitations on our use of the proceeds from our $55.0 million Bank of America Credit Facility for purposes unrelated to our U.S. cinema activities.
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Our bank loans with the Bank of America, NAB, and Westpac require that our Company comply with certain covenants. The longer the COVID-19 pandemic and the associated limitations (both legal and practical) on our business exist, the more likely it becomes, in the absence of other actions by our Company, that we will be unable to continue to comply with these covenants. However, in such an event, our Company expects to be able to obtain an amendment or waiver from its lenders, though no assurances can be given. We believe that our lenders understand that the current situation is not of our making, that we are doing everything that can reasonably be done, and that our relationship with our lenders is good. In an effort to mitigate the need for such waivers, we are looking to our real estate assets to provide needed liquidity. Our 44 Union Square property in Manhattan, with 73,000 net rentable square feet of retail and office space, received a temporary certificate of occupancy for the core and shell of the building on August 31, 2020 and is in the lease-up phase with construction being complete (except for minor punch list items). On January 24, 2020, we exercised the first of our two extension options on the Bank OZK (formerly Bank of the Ozarks) loan, extending the maturity date to December 29, 2020. On December 29, 2020, we further extended the maturity of this loan to March 31, 2021, at an interest rate of 17.5% and on March 26, 2021, we repaid this loan in full in the amount of $40.6 million. We are currently working on a refinancing of the property and, while no assurances can be given, based on current facts and circumstances, we are optimistic that the refinancing, which will free up substantial capital, can be finalized in the second quarter of 2021. On March 4, 2021, we sold our Manukau land for NZ$77.2 million (US$56.1 million). On March 5, 2021, we sold our Coachella land for $11.0 million. As a 50% member in Shadow View Land & Farming LLC, the Company received 50% of the Coachella net sale proceeds. Unlike pure cinema exhibition companies, we own the fee interest underlying 12 of our cinemas and all of our Live Theatres.
Prior to the COVID-19 pandemic, our cinema exhibition business plan had been to enhance our current cinemas where it was financially reasonable to do so; develop our specialty cinemas in select markets; expand our F&B offering, and continue on an opportunistic basis, to identify, develop, and acquire cinema properties that allow us to leverage our cinema expertise over a larger operating base. This continues to be our plan once we are able to fully reopen, subject to liquidity constraints.
We continue to advance most of our real estate initiatives as these are, generally speaking, still in the planning stage and, as a result, less impacted than projects in their construction phase. We, fortunately, have only two projects in a construction phase – the redevelopment of our 44 Union Square property in Manhattan and the refurbishment of our Consolidated Theatre at the Kahala Mall in Honolulu. 44 Union Square received a temporary certificate of occupancy for the core and shell of the building on August 31, 2020 and is in the lease-up phase following completion of construction with the exception of minor punch list items. We anticipate that our Consolidated Theatre at the Kahala Mall will reopen for business after construction is completed, which should follow a few months of work upon recommencement of construction once COVID-19 related Hawaiian government restrictions have been relaxed.
Our pre-COVID-19 business plan with respect to the Real Estate segment of our business was to continue the build-out of our Newmarket Village and Auburn Redyard ETCs in Australia; to master-plan the redevelopment of our Courtenay Central site in New Zealand into an urban entertainment center with a focus on cinema exhibition and food & beverage; in Manukau/Wiri, New Zealand, to develop in concert with other major landowners, the infrastructure needed to support the construction of income-producing light industrial improvements; to reassess and master-plan our 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; 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. Subsequently, during the first quarter of 2021, we sold our Manukau and Coachella non-income producing land assets and have reclassified our Auburn Redyard ETC and Royal George Theatre complex as assets held for sale. Going forward, subject to capital allocation considerations, we will be focusing on completing the lease up of our 44 Union Square property in Manhattan, the further development of our Newmarket and Courtenay Central ETCs in Australia and New Zealand, and the redevelopment of our Cinema 1,2,3 property in Manhattan and our historic railroad properties in Philadelphia.
The success of our Company is naturally dependent on our ongoing ability to execute these business plans effectively through our available resources (both cash and available borrowing facilities), while still addressing our liquidity risk in a timely manner. Liquidity risk is the risk relating to our ability to meet our financial obligations when they come due. Prior to the COVID-19 pandemic, our financial obligations arose mainly from capital expenditure needs, working capital requirements, and debt servicing requirements. We managed the liquidity risk by working to generate adequate cash flows from operating activities, to obtain and maintain appropriate financing or extension of maturity dates under reasonable arrangements, and/or to convert non-performing or non-strategic assets into cash as appropriate under the circumstances. During the pandemic, we had to rely on our ability to control costs, to generate revenue from different sources, and to maintain and obtain adequate and reasonable financing, while at the same time reviewing and, where appropriate, acting upon our ability to convert non-strategic assets into cash, if needed. Historically, we have funded our capital expenditures out of operating cash flow. Obviously, with our revenues severely curtailed by the closure and other limitations imposed on our cinema activities, we have needed to look to our lenders for the near term. However, we remain confident in our cinema industry and that it will once again be the primary engine through which we fund our liquidity needs.
The impact of the COVID-19 pandemic on our business has reduced our liquidity and our Management, consequently, has postponed, or reprioritized most of our capital expenditures based on assessments of conditions and liquidity requirements.
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During 2021, we anticipate that we will continue to limit our capital expenditures, and as a result, we currently estimate that our cash capital expenditures in both our cinema and real estate segments in 2021 will not exceed $25.5 million. The projects requiring capital expenditures in 2021 will include: (i) with respect to our cinema business, the renovation of existing global cinemas and the construction of new cinemas in Australia and (ii) with respect to our real estate business, capital for the build out/fit out of third party tenant spaces. The Company believes that 2021 capital expenditures will be paid for by funds raised by asset sales, cash flow from operations and/or funds available under global credit facilities. The Company is surrounded by uncertainty about COVID-19, as well as financial, economic, competitive, regulatory, and other factors, many of which are beyond its control. If the Company is unable to generate sufficient cash flow in the upcoming months or if its cash needs exceed the Company’s borrowing capacity under its available facilities, it could be required to adopt one or more alternatives, such as reducing, delaying or eliminating such planned capital expenditures, selling additional assets or restructuring debt.
For more information about our liquidity, please refer to Note 3 – Impact of COVID-19 Pandemic on Liquidity to the Consolidated Financial Statements included herein in Part II, Item 8 (Financial Statements and Supplementary Data) on this report.
Refer to Note 11 – Borrowings for additional information.
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 last five years:
Total Resources (cash and borrowings)
Debt-to-Equity Ratio
Finance lease liabilities 118 209
Changes in Working Capital
(1)This relates to the construction facilities specifically negotiated for 44 Union Square redevelopment project, obtained in December 2016.
(2)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)See Note 2 – Summary of Significant Accounting Policies – Prior Period Financial Statement Correction of Immaterial Errors for the prior period adjustments for accounting for accrued sales tax deemed not material.
(4)Typically, our working capital is reported as a deficit, 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.
We manage our cash, investments, and capital structure 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. Before the COVID-19 pandemic, our treasury management has been focused on aggressive cash management using cash balances to reduce debt and minimize interest expense. In the past, we 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. As a result of the COVID-19 pandemic, we chose to fully draw down on most of our lines of credit in order to provide liquidity for the Company during a time of minimal revenues.
Refer to Note 11 – Borrowings in the Consolidated Financial Statements for further details on our various borrowing arrangements.
At December 31, 2020, our consolidated cash and cash equivalents totaled $26.8 million. Of this amount, $7.7 million, $6.3 million and $12.8 million were held by our U.S., Australian and New Zealand operations, respectively. Due to the impact of COVID-19, we no longer intend to indefinitely reinvest offshore any earnings derived from our Australian and New Zealand operations.
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We have historically funded our working capital requirements, capital expenditures and investments in individual properties primarily from a combination of internally generated cash flows and debt. During 2020 and into 2021 the need for such funding, apart from working capital, has been and will be substantially reduced, due to the COVID pandemic. The funding that has been required, has been funded from predominantly from cost reductions, debt and strategic asset sales. As noted in the preceding table, we had $6.1 million unused, unrestricted capacity of available corporate credit facilities at December 31, 2020.
The change in cash and cash equivalents for the three years ended December 31, 2020 is as follows:
% Change
Operating Activities
2020 vs. 2019