Since my August 2015 article on global movie theater operator and real estate developer, Reading International’s (NASDAQ:RDI) (see “Reading International’s Q2 2015: Set Records, Full Of News“), achievements continue. The company’s Q3 September 2015 operating results press release and SEC Form 10-Q both contained substantial detail of new milestones achieved, setting the stage for further growth in both cinema and real estate segments.

Following Reading’s major sales of its Moonee Ponds and Burwood Squaredevelopment parcels in Melbourne, Australia and other undeveloped real estate deemed non-core, Reading sports a very conservative balance sheet with net debt of only $83.4MM at 9/30/15. Taking into account an additional $41.1MM final installment payment owed by the REIT that acquired Burwood, this net debt figure is lowered to an adjusted $42.3MM net debt on a balance sheet of $364.4MM of understated book assets and equity. That is less than 12% adjusted debt/equity.

Reading Real Estate Development Milestones During Q3 2015

In both its Q3 press release and its September 30, 2015 10-Q, Reading provided an update on the development progress of five separate real estate parcels/projects in the US, New Zealand and Australia.

Union Square Theatre (Manhattan, New York City): In March 2015, Reading obtained New York Landmarks Commission authorization to redevelop the property with approximately 23,000 additional square feet creating a total of 69,000 square feet of rentable space. [See photo, below] Reading’s 10-Q reported that comparable New York City development property has been sold for $1,100 per buildable square foot. At these valuations, the additional authorized space enhanced the property’s present value by $25MM and greatly enhanced the project’s prospective value by even more.

According to this article, tenants of Reading’s Union Square property have either moved out or are now on month-to-month leases and further governmental/zoning milestones have been achieved. Reading’s application for a variance with the Board of Standards and Approvals recently obtained Manhattan Community Board 5′s recommendation for approval in October. Some additional approval steps for the variance remain and a few more tenants on month-to-month leases will move out by year-end. But Reading’s current intention is to commence pre-construction on Union Square’s redevelopment in the first quarter of 2016.

Cinemas 1, 2 & 3 (Manhattan, New York City): Reading has for some time said that it was evaluating the potential to redevelop this property as a mixed use retail and residential and/or hotel property. However, Reading has provided notable new disclosure that it is currently working with the owners of the adjacent property (on the corner of 3rd Avenue and 60th Street just north of Cinemas 1, 2 & 3) on a feasibility study (being prepared by Edifice Real Estate Partners, LLC) for the joint development of the properties as a mixed-use property. According to Reading’s Q3 results press release, the combined property could be as large as 94,000 square feet not counting up to approximately 15,000 square feet of bonus space from transferable development rights.

Red Yard Entertainment Centre expansion (Sydney, Australia): Reading has substantial undeveloped contiguous land to this long-held shopping center whose anchor tenant is a Reading Cinema multiplex. In this quarter’s releases, Reading announced it plans to add approximately 23,000 square feet of additional retail and restaurant space, a majority of which is pre-leased.

Newmarket Shopping Centre expansion and multiplex (Brisbane, Australia): Reading previously announced plans to expand this shopping center with a new eight-screen Reading Cinemas, 10,000 square feet of additional specialty retail space, and an additional parking level for an estimated cost of $24.6MM (AUD$35MM). Construction is targeted to begin in Q2 2016 for a projected Q4 2017 opening. Reading is also under contract to acquire a 23,000 square foot parcel adjacent to this center that currently houses an office building. It is anticipated that this contract will close on November 30, 2015 and that this parcel will ultimately be integrated into the Newmarket Centre.

Courtenay Central entertainment center expansion (Wellington, New Zealand):Reading’s plan to expand this shopping center with a supermarket for an estimated cost of $11.5 million (NZ$17.0 million) was delayed by severe earthquake damage to the center’s parking lot. In this quarter’s releases, Reading announced it is currently reviewing updated supermarket design and construction costs and expects to advance negotiations with Countdown Supermarket this month. In addition, Reading announced its intent to add approximately 4,500 square feet of additional general retail within the existing shopping center shell and it is currently upgrading the parking structure to a level where it will be the safest (from an earthquake perspective) in Wellington. Reading believes this increased safety will give Courtenay Central a competitive advantage not only in terms of term parking rates but to the shopping center and its anchor tenant, Reading Cinemas.

Reading’s Continues Steps To Grow its Global Cinema Business

In both its Q3 press release and its September 30, 2015 10-Q, Reading provided an update on several cinema new-builds, remodels and expanded offerings in the US, New Zealand and Australia, including:

• a completely renovated 14-screen Reading Cinemas at Harbour Town Shopping Center on the Gold Coast of Queensland, Australia,
• the renovation and October 2015 reopening of a San Diego theater into a 12-screen Angelika Film Center at Carmel Mountain, and
• a new 8-screen multiplex (Reading’s first) in Auckland, New Zealandexpected to open in November 2015.

In this quarter’s releases, Reading also announced that it has entered into its first-ever agreement with IMAX, where it will convert part of its cinema in Bakersfield, California to an IMAX presentation.

The closure of movie theaters that lose money is another way to improve bottom line performance. Reading’s 10-Q disclosed that the company will close a money-losing Reading Cinemas in the Gaslamp district of San Diego in January 2016. This cinema was part of a group of cinemas acquired from Pacific Theaters in 2008 and, though a credit against the acquisition purchase price was received by Reading, the theater has been unprofitable since the acquisition and elimination of these losses will improve future cinema segment cash flow.

Reading’s Global Cinema Business And Its Real Estate Assets Are Not Fairly Valued In RDI’s Stock Price

RDI’s present share price does not adequately reflect the underlying value of the company’s geographically diverse cinema or real estate assets. Over the past year, other authors of articles on Reading have assigned values for RDI at$23-$26/share. (See an October 1, 2015 Barron’s article, entitled “Reading International Stock Can Rise 100%” and another Value Investors Club in November 2014.)

The underlying value of Reading’s real estate (including the embedded appreciated value in both Union Square and Cinemas 1,2 & 3) and Reading’s growing cinema operations are not presently fully valued in the price for RDI shares.

As Reading converts these non- or low-cash flow producing developments into cash flow, it becomes easier for investors to value this real estate, and should contribute to closing the substantial “value gap” in the company’s share price from underlying asset values.

My recent Seeking Alpha article, entitled “In A Year Of Major Events For Reading International, Wanda’s Purchase Of Hoyts Turns Our Head, discussed an estimated $1.95MM per-screen valuation Wanda paid for large Australian/New Zealand exhibitor, Hoyts Group. Such a comparable valuation, in a region where Reading is the 4th largest movie exhibitor in Australia and 3rd largest in New Zealand, right behind Hoyts, implies a $12-$14/share value (a little below RDI’s current stock price) for Reading’s Aussie/NZ cinema segment alone. This cinema segment undervaluation is above and beyond the sizable appreciation embedded in Reading’s global real estate cited in my prior Seeking Alpha articles on Reading.

In an August 2013 Seeking Alpha article on Reading, I discussed a valuation of at least $100MM for just the two above-mentioned New York City redevelopment projects, Cinema 1, 2 & 3 and Union Square, combined. Since 2013, New York City real estate values have continued to skyrocket and additional buildable square feet has been planned for these two properties. Using the $1,100 per buildable square foot, which Reading’s 10-Q has said the market for comparable sales of New York City development property are being reported at, results in an approximate value of $173MM or over $7 per RDI share. While Reading’s plan to further redevelop these parcels creates additional long-term value for Reading and its shareholders, any partial or complete sale of these properties would be reflected more immediately in Reading’s stock price.

Also not included in the above discussion is the value of Australian/New Zealand real estate nor the US cinema segment. Of course, any sum of the parts valuation has to deduct for Reading’s presently very low net debt and going concern overhead costs of whatever businesses are not monetized.

Cotter Family Estate Fight Presents An Additional Catalyst For Unlocking Value And For An Interesting Upcoming Annual Meeting

In September 2014, Reading’s longtime Chairman, CEO and controlling shareholder, James J. Cotter, Sr., passed away leaving a sizable estate. This estate has become the subject of an apparently irreconcilable dispute between his daughters, Ellen and Margaret Cotter and their younger brother, James Cotter, Jr.

With Jim, Jr. designated several years ago to be successor CEO, all three of Mr. Cotter’s children, long-time Reading executives and/or board members, had presumably been pursuing the same value-unlocking roadmap that their father had been implementing. However, in February 2015, Margaret and Ellen Cotter, initiated litigation regarding control of their father’s estate, particularly that of Reading’s Class B voting shares (RDIB). This suit in Los Angeles Superior Court, entitled “In re James J Cotter Living Trust dated August 1, 2000,” is important to Reading shareholders because, this trust will eventually hold all of the Cotter family’s RDIB shares (approximately 70% of total current RDIB shares outstanding).

In June, after the Cotter sisters along with some of Reading’s board terminated Jim Cotter, Jr. as Reading’s CEO, Cotter, Jr. filed a shareholder derivative suit and then Whitney Tilson (a fellow Seeking Alpha contributor), along with a long-time Reading investor, Jon Glaser, jointly “intervened” and filed a separate shareholders’ derivative suit all alleging Reading directors have breached their fiduciary duties to shareholders. (For more discussion about these three suits and the search for a new CEO, see my prior Seeking Alpha article on Reading.)

As a result of this family dispute and the information disclosed in the various lawsuits, billionaire investor, Mark Cuban, a long-time shareholder of both RDI and over 13% of RDIB voting shares, converted his 13G (passive) SEC filing in Reading’s RDIB shares to a new 13D (active) SEC filing. Mr. Cuban, an owner of several entertainment businesses, which are synergistic with Reading’s, such as Landmark Theatres, is the 2nd largest holder of RDIB shares behind Cotter Sr.’s estate and trusts.

The dispute among the Cotter family heirs, the ‘activation’ of Mark Cuban’s ownership position, and the RDI shareholder intervention suit should be very positive catalysts for the long overdue unlocking of substantial asset values not presently reflected in Reading’s stock price.

Reading’s Annual Meeting has always been a valuable event to learn of the company’s plans for the coming year. The 2015 Annual Meeting will take place this Tuesday, November 10 in Los Angeles. A recent Seeking Alpha article by Chris DeMuth, Jr. and a Deal Pipeline article both highlight how this meeting may prove more interesting and provide insight into the control fight and the company’s future.

Investment Opportunity

Reading International’s favorable geographically diversified movie exhibition growth profile and its conservative balance sheet make for a compelling risk/reward investment. The company’s growing cash flow generation continues to lower debt levels and inevitably will translate the company’s enterprise value into a higher equity valuation.

Much of Reading’s real estate has appreciated in value (over the course of more than 15 years of inflation on some parcels) from population growth, up-zoning to expanded/more valuable allowed uses, and in some instances, completed development into rent-generating parcels. Reading can create substantial additional value by developing or redeveloping its raw land or fee-owned cinema and live theater sites into higher recurring cash flows or increased sales proceeds.

Recent cinema chain transactions, including Wanda’s purchase of Hoyt’s, have placed a premium on large cinema chain market shares as noted by the high valuation multiples of other larger US publicly-traded theater exhibitors. Reading’s large market shares in Australia (#4), New Zealand (#3) and the United States (#11) should be highly attractive on a break-up or sale of the company.

As Reading continues to grow its sustainable cash flows and unlocks (through sale and/or joint venture) the appreciated value in its geographically diversified real estate holdings, investors should close the substantial “value gap” that presently exists in RDI shares.

The Cotter sibling dispute is likely to result in at least one or more of the heirs losing influence and control at the company and likely favoring a break-up or sale of control of the assets. With Mark Cuban potentially more engaged and Wanda’s new sizable investment in Australia and New Zealand, interesting alliances may form in the future to accelerate the pace of favorable change for Reading shareholders.

Disclosure: Funds I manage are long RDI, RDIB. These funds or its affiliates may buy or sell securities of these issuers at any time.

Additional disclosure: Funds I manage are long RDI, RDIB. These funds or its affiliates may buy or sell securities of these issuers at any time.