READING INTERNATIONAL, INC. 
Ongoing Impact of COVID-19 Pandemic
A number of jurisdictions adopted strict lockdowns aimed at controlling the spread of COVID-19 in the first quarter of 2020. In the second quarter of 2020, several jurisdictions began relaxing COVID-19 restrictions, principally due to pressure on their economies, rather than material containment of COVID-19. Conversely, certain jurisdictions are to varying degrees reinstating their lockdowns due to the re-emergence of COVID-19, while others are continuing to remove restrictions. The current uncertainty resulting from these differing approaches, and the local and global affects that these may have, is expected to continue until the COVID-19 spread is considered materially contained or there is an approved vaccine. At the end ofMay 2020 ,New Zealand's government began easing restrictions on closures and byJune 3, 2020 , ourNew Zealand cinema circuit re-opened, except for our Reading Cinemas at Courtenay Central, which is temporarily closed due to seismic concerns. Upon re-opening, we implemented a number of new safety measures based on guidance from health authorities and applicable government agencies, including physical distancing practices and an increased focus on disinfection and sanitization. As ofJune 8, 2020 , governmentally imposed physical distancing requirements had been discontinued for allNew Zealand cinemas, and we liberalized our admission policies in some respects. Trolls World Tour released inNew Zealand onJuly 1, 2020 , drew patrons back to our cinemas, but the lack of new major movies has led to declines in attendance even with the safety measures we have implemented compared to the same period in 2019. The next major movie slated for release inNew Zealand is Warner Bros.'s Tenet onAugust 27, 2020 . While we are encouraged by the strong slate of movies from the major studios currently scheduled for release inNew Zealand in the third and fourth quarters of 2020 and beyond, no assurance can be given that these current release dates will hold. OnJuly 1, 2020 , we re-opened our Australian cinema circuit and implemented a number of new safety protocols. However, onJuly 8, 2020 , we had to close six of our seven theaters in the state ofVictoria , due to a spike in new COVID-19 cases, as the local government ordered a six-week closure. OnAugust 5, 2020 , the seventh cinema had to be closed as the state announced a full lockdown, which has been proposed to last untilmid-September 2020 . No new tentpole movies have been released to the Australian market since our cinemas have re-opened. Therefore, our attendance has been light. As of today, the first major movie slated for release inAustralia isChristopher Nolan's Tenet onAugust 27, 2020 , with the exception to the state ofVictoria which will release the film upon government restrictions easing and the re-opening of cinemas in that jurisdiction. Again, while we are encouraged by the strong slate of movies from the major studios currently scheduled for release inAustralia in the third and fourth quarters of 2020 and beyond, no assurances can be given that these current release dates will hold. Inthe United States , we are developing a comprehensive strategy for when we re-open our 24 cinemas inCalifornia ,Hawaii ,Texas ,New York ,New Jersey ,Virginia , andWashington, D.C. OnSeptember 3, 2020 , the long-awaited Tenet is scheduled to open in theU.S. in select cities. Like our circuits inNew Zealand andAustralia , we will re-open our cinemas with an elevated set of cleaning protocols and new operating strategies, including physical distancing through reduced seat counts. We expect to announce shortly an opening date for select cinemas in markets where cinemas are permitted to operate. We will announce opening dates for our other cinemas in theU.S. upon receiving (i) greater certainty from the major studios as to their release schedule and (ii) clearance from the local government authorities. If local government authorities remove restrictions, we anticipate opening one to two weeks prior to the opening of at least two major studio releases. Since the end ofMarch 2020 , we have been in discussions with our landlords concerning negotiations of rent abatement or deferrals. In most cases, we were able to achieve deferrals from April to July of 2020 with terms of repayment beginning in 2021, which will preserve the Company's liquidity. These negotiations were completed on a location-by-location basis. While no assurances can be given on future deferrals, if there is a delay in the timing of the theatre re-openings, we may be able to negotiate additional occupancy relief.
Our Results Continue to be Impacted by COVID-19
The repercussions of the COVID-19 pandemic resulted in a drastic decrease in our
Company's revenues and earnings in the second quarter of 2020. We believe that
the lack of new product, the ongoing temporary closures of many of our cinemas,
and our social distancing measures materially adversely impacted our second
quarter 2020 cinema attendance. Naturally, during the period in which our
cinemas remain closed, we will continue to experience a significant loss of
revenues and negative operating income.
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Our real estate business has been less significantly impacted by the COVID-19
pandemic than our cinema business. In Australia , our centers at Newmarket
Village (Brisbane area, QLD), Cannon Park (Townsville, QLD), The Belmont Common
(Perth area, WA), and Auburn Redyard (Sydney area, NSW) remained open for
business through the second quarter of 2020. In the United States , we have
received some rental revenue related to our live theatre business and began
recording revenue from our Culver City tenant in the second quarter of 2020.
However, while our real estate assets comprise a significant portion of our
asset value, they have historically been responsible for only approximately 9%
of our revenues and 24% of our overall operating income.
Our Company will likely continue to be significantly impacted by the COVID-19
pandemic even after all of our cinemas have re-opened. The global economic
impact of the COVID-19 pandemic has led to high levels of unemployment in our
operating jurisdictions and may lead to lower consumer spending in the near
term. Physical distancing and increased cleaning protocols may also delay our
ability to produce financial results at pre-COVID-19 pandemic levels. Finally,
in order to attract guests to our cinemas, we need to offer compelling movies
that they want to see in a cinema environment. While we believe that the major
studios will be releasing a strong slate of movies through the end of 2020 and
into 2021, no assurances can be given that the major studios will maintain
current release dates or as to the timeline for the development, production, and
release of new movies.
Counter balancing to some extent the challenges posed by the COVID-19 pandemic
on a going forward basis, are what we believe to be the ongoing desire of people
to enjoy entertainment outside of their homes. While no assurance can be given,
we believe that, as our society re-opens, we will see cinemas once again return
to their historic position as a principal source of outside the home
entertainment, both in the U.S. and abroad. In the U.S. we have maintained key
operating personnel in place and have worked out arrangements with substantially
all of our landlords to maintain our leases while conserving cash; we are ready
to expeditiously open our cinemas, when film becomes available and consumer
demand returns in accordance with the respective government guidelines and
restrictions.
BUSINESS OVERVIEW
We are an internationally diversified company principally focused on the
development, ownership, and operation of entertainment and real estate assets in
?Cinema exhibition, through our 60 multiplex cinemas.
?Real estate, including real estate development and the rental of retail, commercial, and live theatre assets.
For the last several years, we have consistently stated that these two business segments have complemented 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. As we navigate the uncertainty and challenges posed by the global COVID-19 pandemic, we continue to believe that this two-pronged diversified international business strategy has supported the strength and long-term viability of our Company. We believe that our strong real estate base provides us with flexibility and asset strength not available to those of our competitors who have only cinema leasehold assets.
Key Performance Indicators
Two key performance indicators utilized by management are EBITDA and food and
beverage spend per patron ("SPP"). Due to the COVID-19 pandemic and the
temporary closure of substantially all of our live theatre and cinema operations
in the U.S. , Australia, and New Zealand for most of the three and a substantial
portion of the six month periods ended June 30, 2020 , 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.
?
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Cinema Exhibition Overview
We operate our worldwide cinema exhibition businesses under various brands:
?in the
?in
?in
Shown in the following table are the number of locations and screens in our
theater circuit in each country, by state/territory/region, our cinema brands,
and our interest in the underlying assets as of
Interest in
Asset
State / ?Underlying the
Territory / Location Screen Cinema
Country Region Count Count Leased Owned Operating Brands
United States Hawaii 9 98 9 Consolidated Theatres
Reading Cinemas,
California 7 88 7 Angelika Film Center
Angelika Film Center,
New York 3 16 2 1 City Cinemas
Texas 2 13 2 Angelika Film Center
New Jersey 1 12 1 Reading Cinemas
Virginia 1 8 1 Angelika Film Center
Washington,
D.C. 1 3 1 Angelika Film Center
U.S. Total 24 238 23 1
Australia Victoria 7 51 7 Reading Cinemas
New South
Wales 6 44 4 2 Reading Cinemas
Reading Cinemas, Event
Queensland 5 50 2 3 Cinemas(1)
Western
Australia 2 16 1 1 Reading Cinemas
South
Australia 2 15 2 Reading Cinemas
Reading Cinemas, State
Tasmania 2 14 2 Cinema
Australia
Total 24 190 18 6
New Zealand Wellington 3 18 2 1 Reading Cinemas
Reading Cinemas, Rialto
Otago 3 15 2 1 Cinemas(2)
Reading Cinemas, Rialto
Auckland 2 15 2 Cinemas(2)
Canterbury 1 8 1 Reading Cinemas
Southland 1 5 1 Reading Cinemas
Bay of Plenty 1 5 1 Reading Cinemas
Hawke's
Bay 1 4 1 Reading Cinemas
New Zealand
Total 12 70 7 5
GRAND TOTAL 60 498 48 12
(1)The Company has a 33.3% unincorporated joint venture interest in a 16-screen
cinema located in Mt. Gravatt,
(2)The Company is a 50% joint venture partner in two New Zealand Rialto Cinemas, with a total of 13-screens. We are responsible for the booking of these cinemas and our joint venture partner, Event Cinemas, manages their day-to-day operations.
Real Estate Overview
We engage in the real estate business through development and our ownership and rental or licensing to third parties of retail, commercial and live theatre assets. We own the fee interests in all of our live theatres, and in 12 of our cinemas (as presented in the preceding table). Our real estate business creates long-term value for our stockholders through the continuous improvement and development of our investment and operating properties, including our ETCs.
Our real estate activities have historically consisted principally of:
?the ownership of fee or long-term leasehold interests in properties used in our cinema exhibition activities or which were acquired for the development of cinemas or cinema-based real estate development projects;
?the acquisition of fee interests in land for general real estate development;
?the licensing to production companies of the use of our live theatres; and,
?the redevelopment of our existing fee-owned cinema or live theatre sites to their highest and best use.
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Cinema Exhibition
Our cinema revenue consists primarily of admissions, Food & Beverage ("F&B"),
advertising, gift cards, theater rentals, and online convenience fee revenue
generated by the sale of our cinema tickets at the theater, on our own websites,
and mobile apps. Cinema operating expense consists of the costs directly
attributable to the operation of the cinemas, including film rent expense,
operating costs, and occupancy costs. Cinema revenue and expense fluctuate with
the availability of quality first run films and the numbers of weeks such first
run films stay in the market. For a breakdown of our current cinema assets that
we own and/or manage, please see Part I, Item 1 - Our Business of our 2019 Form
10-K.
While our capital projects in recent years have been focused in 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 are as follows:
?Acquisition of a well-established Cinema in Devonport,Tasmania, Australia : OnJanuary 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 onJanuary 30, 2019 . ?Leased a Cinema space inLower Hutt , adjacent toWellington, 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 lateJune 2019 . ?Acquisition of a Dynamic Arthouse Cinema inHobart ,Tasmania, Australia : OnDecember 5, 2019 , we acquired 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 inMelbourne, Australia : OnDecember 6, 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. ?U.S. Refurbishments: In 2019 and 2020, we continued to invest in the refurbishment and enhancements of our existing cinemas, as contemplated by our strategic plan. During this period, three locations had significant refurbishment work performed: ourRohnert Park location inCalifornia and ourMililani and Kahala (work commenced in late 2019 but is currently suspended due to the COVID-19 shutdown) locations inHawaii .
?AU and NZ Refurbishments: In 2019 and 2020, we improved eight theaters:
?
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Cinema Pipeline
In the first quarter of 2020, we continued with the renovation of ourConsolidated Theatres at theKahala Mall inHonolulu in theU.S. However, this renovation has been halted due to the governmental restrictions imposed due to the COVID pandemic. We do not have a definitive schedule for re-commencing this renovation. InAustralia , we previously announced the construction of four new Reading Cinemas pursuant to Agreements to Lease: (i)Altona , VIC, (ii) Traralgon, VIC, (iii) Jindalee, QLD and (iv)South City Square inBrisbane , QLD. We have an agreement-in-principle with ourAltona landlord in theState 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 early 2021. With respect to our Traralgon cinema in theState 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 do not anticipate that the cinema in Traralgon will open in 2020. Practical Completion has been achieved forAltona , with Traralgon and Jindalee expected to be achieved during the fourth quarter 2020. We will continue to evaluate the timing of these fit-out obligations in light of our future capital needs. 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 2020, we will also be focusing on the rollout and 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 experience and product 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, we anticipate launching limited F&B ordering online for our cinema circuits in theU.S. ,Australia, and New Zealand during the third quarter of 2020. Cinema Closures As of the end of the first quarter of 2020, all of our cinemas inthe 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 inAustralia and New Zealand , and the restrictions have been reduced by local government authorities, we have re-opened most of our cinemas inAustralia and all of our cinemas inNew Zealand (other than our cinema at Courtenay Central). As ofJune 3, 2020 , we had re-opened ourNew Zealand circuit except for our Reading Cinemas at Courtenay Central (which continues to be closed due to seismic concerns). As ofJuly 1, 2020 , we had re-opened our Australian cinema circuit, however, as ofAugust 5, 2020 , due to a spike in new COVID-19 cases, we shut down all seven of our theaters in the state ofVictoria . In theU.S. , we currently anticipate re-opening our cinemas once we have certainty that the major studios will begin releasing major tentpole movies in our cinemas and local government restrictions permit the opening of movie theaters. Until those conditions are met, we will not announce re-opening dates. InJanuary 2019 , we temporarily closed our Courtenay Central cinema inWellington, New Zealand . This temporary closure is ongoing due to seismic concerns. While we have continued during the COVID-19 pandemic 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 situation, we have no fixed time frame for the commencement of the redevelopment of this property. During the second quarter of 2019, the Company's management agreement for the operation of the 86th Street Cinema inNew York City terminated due to the expiration of the underlying lease. Additionally, during the third quarter of 2019, the leases underlying our historically profitableParis Theatre andBeekman Theatre inNew York City both expired. We were unable to obtain extensions or new leases for these cinemas on commercially reasonable terms. InDecember 2019 , we temporarily closed ourConsolidated Theatres at theKahala Mall inHonolulu for a top-to-bottom renovation, a closure that is currently ongoing. The renovation is not yet completed, and our construction has been effectively halted by the governmental restrictions imposed on us in reaction to the COVID-19 pandemic. When re-opened, 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. ? 37
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Upgrades to our Film Exhibition Technology and Theater Amenities
As previously discussed, we continue to focus on areas of the well-established cinema business where we believe we have growth potential and ultimately, provide long-term value to our stockholders. In order to meet our changing role in the entertainment industry, we have invested both in (i) the upgrading of our existing cinemas and (ii) developing new cinemas to provide our customers with premium offerings, including state-of-the-art presentation (including sound, lounges, and bar service), and luxury recliner seating. As ofJune 30, 2020 , all of the upgrades to our theater circuits' film exhibition technology and amenities over the years are as summarized in the following table: Location Screen ?Count ?Count Screen Format Digital (all cinemas in our theater circuit) 60 498 IMAX 1 1 TITAN XC and LUXE 24 29 Dine-in Service Gold Lounge (AU/NZ)(1) 9 24 Premium (AU/NZ)(2) 14 33 Spotlight (U.S.)(3) 1 6 Upgraded Food & Beverage menu (U.S.)(4) 16 n/a Premium Seating (features recliner seating) 26 161 Liquor Licenses (Selling)(5) 33 n/a (1)Gold Lounge : This is our "First Class Full Dine-in Service" in our Australian andNew 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 andNew 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: OnMarch 30, 2018 we opened "Spotlight," our first dine-in cinema concept inthe United States at Reading Cinemas inMurrieta, California . Six of our 17 auditoriums at this theater feature this dine-in concept. (4)Upgraded Food & Beverage Menu: 16 of ourU.S. theaters feature an elevated F&B menu served from a common counter, which includes, without limitation, beer, wine and/or spirits, and a food menu beyond traditional concessions. We have worked with former Food Network executives to create a menu of locally inspired and freshly prepared items. (5)Liquor Licenses: Licenses are applicable at each cinema location, rather than each 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 ofJune 30, 2020 , we have six pending applications for additional liquor licenses in theU.S.
Real Estate
As of
?
?two single-auditorium live theatres inManhattan (Minetta Lane and Orpheum) and a four-auditorium live theatre complex (including the accompanying ancillary retail and commercial tenants) inChicago (TheRoyal George );
?our worldwide headquarters' building in
?the ancillary retail and commercial tenants at some of our non-ETC cinema properties.
In late March of 2020, trading restrictions enforced by the government affected many of our tenants at our properties, includingNewmarket 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), although trading restrictions were enforced, all of these properties remained open for business through the COVID-19 crisis. These affected tenants represented a majority of the third-party tenants at each of these centers. However, most of our tenants are currently open for business at ourAustralia and New Zealand properties (other than tenant's whose closures were unrelated to the COVID-19 pandemic).
In addition, we have various parcels of unimproved real estate held for
development in
Our key real estate transactions in recent years are as follows:
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Strategic Acquisitions
?Purchase of Property inAuburn ,Australia - OnJune 29, 2018 , we added 20,870 square feet of land, improved with a 16,830 square foot office building, to our Auburn Redyard ETC. The property was acquired at auction for$3.5 million (AU$4.5 million) and is bordered by our existing ETC on three sides. The property is leased to Telstra throughJuly 2022 . This lease will allow us time to plan for the efficient integration of the property into our ETC. With this acquisition, Auburn Redyard now represents approximately 519,358 square feet of land, with approximately 1,641 feet of uninterrupted frontage toParramatta Road , a majorSydney arterial motorway. ?Exercise of Option to Acquire Ground Lessee's interest in Ground Lease and Improvements Constituting the Village East Cinema - OnAugust 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 inManhattan . The purchase price under the option is$5.9 million . It is now anticipated that the transaction will close on or aboutMay 31, 2021 . OnMarch 12, 2020 , we amended the original agreement to (i) extend the term of the lease toJanuary 31, 2022 and extend the put option toDecember 4, 2021 and (ii) at the request ofSutton Hill Capital L.L.C. ("SHC"), in connection with our deferral of the closing date for our acquisition of SHC's interest in the Village East Cinema, the Company reinstated and extended untilDecember 4, 2021 SHC's right to put that interest to us. That put right had previously expired onDecember 4, 2019 . We are advised by SHC that it wanted this reinstatement and extension in order to assure itself that, in the event of the non-performance by us of our current contractual obligation to close our purchase of the interest in the ground lease on or about the extended date ofMay 31, 2021 , that it could (as, in effect, an additional remedy) exercise this reinstated and extended put right. As the transaction is a related party transaction, it was reviewed and approved by our Board'sAudit 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 .
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 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.
?Sepulveda Office Building (Culver City ,U.S. ) - OnMay 27, 2020 , we leased on a multi-year basis the entire second floor of our headquarter building inCulver City, California (approximately 11,000 usable square feet) to WWP (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, which is responsible for building out its space. On a straight-line basis, rent commenced during the second quarter of 2020, and we anticipate receiving rental payments during the fourth quarter of 2020. ?44 Union Square (New York City ,U.S. ) - Historically known as Tammany Hall, this building with approximately 73,113 square feet of net rentable area overlooksManhattan's Union Square . During the COVID-19 pandemic,New York City shut down 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. OnJuly 1, 2020 , the site re-opened for construction activities, and we anticipate that the core and shell temporary certificate of occupancy will be in place by the end ofAugust 2020 as only the completion of certain fireproofing remains to be completed. While the Real Estate Board ofNew York prohibited leasing activity during the COVID-19 shutdown, inJune 2020 , our leasing team commenced ramping up their leasing efforts. This building, hailed as a dramatic pièce de résistance with its first in the city, over 800-piece glass dome, bringing the future toNew York's fabled past and was awarded in 2017 the AIA QUAD Design Honor Award, and the Architizer A+ Awards, Typology Winner, Commercial Award. It is one of a very limited number of "brandable" sites available for immediate lease inNew York City . We believe44 Union Square will be attractive to potential tenants interested in both (i) operating inNew York City and (ii) seeking to have greater control over the size and design of their spaces in a post-COVID-19 environment. As a practical matter, the building has now reached a state of completion where the premises can be delivered immediately upon the execution of leases. ?Minetta Lane Theatre (New York City ,U.S. ) - We have completed an initial feasibility study regarding the potential redevelopment of this property. However, at the present time, our theatre is being 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 is recording and making available to the public through the Audible streaming service. Due to COVID-19, no shows have been presented sinceMarch 2020 . 39 -------------------------------------------------------------------------------- ?Cinemas 1,2,3 Redevelopment (New York City ,U.S. ) - As previously disclosed, our endeavors to negotiate a joint development deal with our adjoining neighbors have not borne fruit. Given the closure of our two cinemas inNew York City's UpperEast 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.
?Manukau/Wiri Land Rezoning (Auckland, New Zealand ) - We continued to progress the infrastructure plans for our 64.0-acre property, which we previously re-zoned from agricultural to light industrial uses, and to the remaining 6.4-acre property, zoned for heavy industrial use, each located in the highly sought after industrial market of Manukau/Wiri close to theAuckland Airport . InJune 2020 , theAuckland Council granted to us and the adjoining landowner, subject to certain conditions, certain consents required to construct certain infrastructure needed to take advantage of the new light industrial zoning. Notwithstanding that theAuckland Airport recently announced that the COVID-19 pandemic may lead to an indefinite suspension of certain expansion plans, including the "Park and Ride" facility near our property, we continue to view the industrial property sector as being one of the most resilient in the current economic climate. We believe that the work completed to date has contributed to the overall value of our land in Manukau/Wiri. ?Courtenay Central Redevelopment (Wellington, New Zealand ) - Located in the heart ofWellington -New Zealand's capital city - our Courtenay Central property covers 161,071 square feet of land situated proximate to (i) theTe Papa Tongarewa Museum (attracting over 1.5 million visitors annually, pre-COVID), and (ii) across the street from the site of the futureWellington 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 toWakefield 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.
Corporate Matters
?Stock Repurchase Program - Our Board approved a$25.0 million repurchase program onMarch 2, 2017 and onMarch 14, 2019 , extended the program throughMarch 2, 2021 . Under this authorization Reading may repurchase its Class A Non-Voting Common Stock from time to time in accordance with the requirements of theSecurities and Exchange Commission on the open market, in block trades and in privately negotiated transactions, depending on market conditions and other factors. ThroughJune 30, 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 six months endedJune 30, 2020 , at an average price of$8.92 per share. These purchases occurred in the first quarter of 2020. OnMarch 10, 2020 , our Board of Directors authorized a$25.0 million increase to our stock repurchase program, bringing our total authorized repurchase amount remaining to$26.0 million , and extended the program toMarch 2, 2022 . Due to the COVID-19 pandemic and its impact on our overall liquidity, our stock repurchase program will likely take a lower capital allocation priority for the foreseeable future. ?Board Compensation and Stock Options Committee - OurCompensation and Stock Options Committee , in early 2020, determined to pay out no cash bonuses, with respect to 2019, to any Reading senior executives, including our CEO. No non-employee director RSUs or stock options have been issued with respect to 2020. ? 40
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Our Financing Strategy
Prior to COVID-19, our treasury management used cash balances to reduce debt. 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 negotiate for 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 necessary liquidity to see us through the COVID-19 crisis.
In response to the COVID-19 pandemic, the closure of our theaters, and the
trading restrictions placed on many of our real estate tenants at our
entertainment themed shopping centers, we had, as of
As a result of the impact of COVID-19, we have obtained certain modifications to our loan agreements with theBank of America, N.A ., National Australia Bank, andWestpac New Zealand Limited for the quarter endedJune 30, 2020 to ensure future liquidity in light of the COVID-19 pandemic. These loan modifications included changes to some of the covenant compliance terms and waivers to certain covenant testing periods for these lenders. We currently have no covenant breaches to which loan modifications or waivers to the covenant testing periods have not been obtained.Bank of America Loan OnMarch 6, 2020 , we (i) entered into an amendment for our$55.0 million credit facility withBank of America , which supports ourU.S. Cinema operations, extending the maturity date toMarch 6, 2023 and implementing an interest rate of 2.5% - 3.0% dependent on certain financial ratios plus a variable rate and (ii) extended the term of our$5.0 million line of credit withBank of America toMarch 6, 2023 . OnAugust 7, 2020 , we modified certain financial covenants within this credit facility and temporarily suspended the testing of certain other covenant tests through measurement period endingSeptember 30, 2021 . The testing of the financial covenant resumes for measurement period endingDecember 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%. 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 underU.S. GAAP.
Cinemas 1,2,3 Term Loan
OnMarch 13, 2020 ,Sutton Hill Properties LLC , our 75% subsidiary, increased its term loan withValley National Bank to$25.0 million from$20.0 million , with an interest rate based on (i) the two yearU.S. Treasury Rate plus 2.5% or (ii) 4.25%, whichever is greater. The current interest rate used for the Valley National Loan is 4.25%.
Australian NAB Corporate Term Loan (AU)
Prior to COVID-19, inMarch 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 ofJune 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 ofDecember 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 underU.S. GAAP. OnAugust 6, 2020 , we modified certain covenants within this Revolving Corporate Markets Loan Facility with NAB (the "NAB Amendment"). These modifications apply until the quarter endedJune 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 throughJune 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 endedJune 30, 2021 . Such a modification was not considered to be substantial underU.S. GAAP. 41
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Westpac Bank Corporate Credit Facility (NZ)
OnDecember 20, 2018 , we restructured our Westpac Corporate Credit Facilities. The maturity of the 1st tranche (general/non-construction credit line) was extended toDecember 31, 2023 , with the available facility being reduced from NZ$35.0 million to NZ$32.0 million. The facility bears an interest rate of 1.75% above the Bank Bill Bid Rate on the drawn down balance and a 1.1% line of credit charge on the entire facility. The 2nd tranche (construction line) with a facility of NZ$18.0 million was removed. OnJune 29, 2020 , Westpac pushed out theJune 30, 2020 covenant testing date toJuly 31, 2020 . OnJuly 27, 2020 , Westpac waived the requirement to test certain covenants as ofJuly 31, 2020 . This agreement also increased the interest rate and line of credit charge to 2.40% above the Bank Bill Bid Rate and 1.65%, respectively. The maturity date was extended toJanuary 1, 2024 . Such modifications of this facility were not considered to be substantial underU.S. GAAP.
Refer to our 2019 Form 10-K for more details on our cinema and real estate segments. ?
42
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RESULTS OF OPERATIONS
The table below summarizes the results of operations for each of our principal business segments along with the non-segment information for the quarter and six months endedJune 30, 2020 andJune 30, 2019 , respectively: Quarter Ended % Change Six Months Ended % Change June 30, June 30, Fav/ June 30, June 30, Fav/ (Dollars in thousands) ?2020 ?2019 ?(Unfav) ?2020 ?2019 ?(Unfav) SEGMENT RESULTS Revenue Cinema exhibition$ 1,217 $ 72,296 (98) %$ 47,527 $ 130,223 (64) % Real estate 2,303 5,564 (59) % 6,905 10,994 (37) % Inter-segment elimination (98) (1,851) 95 % (1,782) (3,716) 52 % Total revenue 3,422 76,009 (95) % 52,650 137,501 (62) % Operating expense Cinema exhibition (13,758) (58,086) 76 % (57,734) (108,280) 47 % Real estate (1,589) (2,438) 35 % (4,349) (4,883) 11 % Inter-segment elimination 98 1,851 (95) % 1,782 3,716 52 % Total operating expense (15,249) (58,673) 74 % (60,301) (109,447) 45 % Depreciation and amortization Cinema exhibition (3,764) (4,091) 8 % (7,543) (8,247) 9 % Real estate (1,275) (1,354) 6 % (2,575) (2,731) 6 %
Total depreciation and
amortization (5,039) (5,445) 7 % (10,118) (10,978) 8 %
General and
administrative expense
Cinema exhibition (949) (937) (1) % (2,158) (1,929) (12) % Real estate (246) (427) 42 % (601) (878) 32 % Total general and administrative expense (1,195) (1,364) 12 % (2,759) (2,807) 2 % Segment operating income Cinema exhibition (17,254) 9,182 (>100) % (19,908) 11,767 (>100) % Real estate (807) 1,345 (>100) % (620) 2,502 (>100) % Total segment operating income$ (18,061) $ 10,527 (>100) %$ (20,528) $ 14,269 (>100) % NON-SEGMENT RESULTS Depreciation and amortization expense (227) (127) (79) % (419) (188) (>100) % General and administrative expense (3,907) (4,670) 16 % (8,288) (9,710) 15 % Interest expense, net (2,004) (2,204) 9 % (3,797) (4,055) 6 % Equity earnings of unconsolidated joint ventures (274) 327 (>100) %
(195) 361 (>100) %
Other income (expense) 19 71 (73) % (196) 50 (>100) % Income before income taxes (24,454) 3,924 (>100) % (33,423) 727 (>100) % Income tax benefit (expense) 1,567 (1,630) >100 % 4,580 (573) >100 % Net income (loss) (22,887) 2,294 (>100) % (28,843) 154 (>100) % Less: net income (loss) attributable to noncontrolling interests (185) (37) (>100) % (266) (53) (>100) % Net income (loss) attributable to RDI common stockholders$ (22,702) $ 2,331 (>100) %$ (28,577) $ 207 (>100) % Basic earnings (loss) per share$ (1.04) $ 0.10 (>100) %$ (1.31) $ 0.01 (>100) %
Consolidated and Non-Segment Results:
Second Quarter and Six Months Net Results
Net income attributable to RDI common stockholders decreased by$25.0 million , to a loss of$22.7 million for the quarter endedJune 30, 2020 , compared to the same period in the prior year. Basic EPS for the quarter endedJune 30, 2020 decreased by$1.14 , to a loss of$1.04 compared to the quarter endedJune 30, 2019 , mainly attributed to ongoing temporary closure of a portion of our cinemas during the second quarter of 2020, offset to some extent by the re-opening of most of our Australian and all of ourNew Zealand cinemas (other than our cinema at Courtenay Central) in June of 2020. For the six months endedJune 30, 2020 , net income attributable to RDI common stockholders decreased by$28.8 million , to a loss of$28.6 million , compared to the same period prior year. Basic EPS for the six months endedJune 30, 2020 decreased by$1.32 , to a loss of$1.31 compared to the six months endedJune 30, 2019 . These results are due to the COVID-19 pandemic which led to the temporary closures of all of our global cinemas in March of 2020. Prior to the cinema closures, however, seat occupancy was already being reduced in order to implement social distancing measures and limit the spread of the virus for the health and safety of moviegoers, as well as our employees. In regard to our Real Estate Segment, many of the tenants at our centers were affected by governmental trading restrictions inAustralia and New Zealand , however, all of our Australian retail centers remained open for business through the COVID-19 crisis. While the COVID-19 pandemic impacted the operations of certain tenants at our Australian centers, occupancy across our Australian centers for our third-party tenants was over 85% as ofJune 30, 2020 . Tenants in ourNew Zealand properties were also impacted by governmental enforced closures on the entire country for a four-week period. However, due to the proactive decision of theNew Zealand government, most tenants are now trading well, with no further restrictions. 43
-------------------------------------------------------------------------------- With respect to both the quarter and the six-month period, net income attributable to RDI common stockholders was adversely impacted by the declining value of the Australian andNew Zealand dollar versus theU.S. dollar compared to the same periods for the prior year.
Revenue for the quarter ended
Revenue for the six months endedJune 30, 2020 decreased by 62%, or$84.9 million , to$52.7 million compared to the same period prior year. Revenue decreased in the Cinema operating segment across all three countries due to the temporary closure of our cinemas inthe United States ,Australia, and New Zealand as a result of COVID-19 partially mitigated by the re-opening of most of our Australian and all of ourNew Zealand cinemas (other than our cinema at Courtenay Central) in June of 2020. In our Real Estate segment, revenue decreased as a result of the ongoing temporary closure of ourLive Theatres , rent abatements provided to third-party tenants in our Australian ETCs, the weakening foreign exchange rate of the Australian andNew Zealand dollars, as well as the trading restrictions enforced by the local governments on our real estate operations inAustralia and New Zealand , beginning in late March of 2020.
Non-Segment General & Administrative Expenses
Non-segment general and administrative expense for the quarter endedJune 30, 2020 decreased by 16%, or$0.8 million , to$3.9 million compared to the same period in the prior year. For the six months endedJune 30, 2020 , non-segment general and administrative expense decreased by 15%, or$1.4 million , to$8.3 million compared to the six months endedJune 30, 2019 due to a decrease in legal fees. Further, inAustralia and New Zealand , we have enjoyed the benefits of wage subsidies provided by their respective governments, which have covered, and continue to cover, a high proportion of the costs of our cinema level personnel inAustralia and virtually all of the costs of our cinema level personnel inNew Zealand . The wage subsidy programs inAustralia and New Zealand are currently scheduled to continue throughSeptember 25, 2020 andAugust 11, 2020 , respectively. The wage subsidy program inAustralia is to be extended but has yet to be codified.
Income Tax Benefit
Income tax benefit for the quarter and six months endedJune 30, 2020 increased by$3.2 million and$5.2 million , respectively, compared to the equivalent prior year period. The change between 2020 and 2019 is primarily related to tax benefits from the carryback of the Company's 2019 net operating loss, as the result of the CARES Act, to 2015 and 2016 tax years where the federal tax rate was 35%, offset by increase in valuation allowance in 2020. 44
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Business Segment Results
As of
?expanded into
?opened a three-screen pop-up in
?ended our management agreement related to the 86th Street Cinema inNew York City due to the expiration of the underlying lease and closed our profitableParis andBeekman theatres inNew York City due to lease expirations;
?launched our six-screen Reading Cinemas in Burwood, a suburb of
?owned and operated five ETCs located inNewmarket Village (a suburb ofBrisbane ),Belmont (a suburb ofPerth ), Auburn Redyard (a suburb ofSydney ), andCannon Park (in Townsville) inAustralia , and Courtenay Central (inWellington ) inNew Zealand ; ?owned and operated our headquarters' office building inCulver City (an emerging high-tech and communications hub inLos Angeles County ) and, during the second quarter 2020, entered a multi-year lease with a corporate tenant for the entire second floor;
?owned and operated our headquarters' office building in
?owned and operated the fee interests in three developed commercial properties inManhattan andChicago 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 ourUnion Square development property with approximately 73,113 square feet of net leasable area comprised of retail and office space, currently in the leasing phase;
?held for development approximately 70.4-acres of developable industrial land
located next to the
?owned a 50% managing member interest in a limited liability company, which in turn owns a 202-acre property inCoachella, California that is zoned approximately 150-acres for single-family residential use (maximum 550 homes) and approximately 50-acres for high density mixed use in theU.S. , that is held for development, and;
?owned 197-acres principally in
Our Company transacts business inAustralia and New Zealand and is subject to risks associated with fluctuations in foreign currency exchange rates. During the second quarter of 2020, compared to the same period prior year, the Australian dollar andNew Zealand dollar weakened against theU.S. dollar by 6.1% and 6.7%, respectively. 45
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Cinema Exhibition
The following table details our cinema exhibition segment operating results for the quarter and six months endedJune 30, 2020 andJune 30, 2019 , respectively: % Change Quarter Ended Six Months Ended Fav/(Unfav) June 30, June 30, June 30, June 30, Quarter Six Months (Dollars in thousands) ?2020 % of Revenue ?2019 % of Revenue ?2020 % of Revenue ?2019 % of Revenue ?Ended Ended REVENUE United States Admissions revenue$ 1 0%$ 24,635 34%$ 13,915 29%$ 44,488 34% (100) % (69) % Food & beverage revenue 94 8% 13,123 18% 7,058 15% 22,699 18% (99) % (69) % Advertising and other revenue 374 31% 3,116 5% 2,802 7% 5,661 4% (88) % (51) %$ 469 39%$ 40,874 57%$ 23,775 50%$ 72,848 56% (99) % (67) %
Australia Admissions revenue
23% $ 12,748 27% $ 30,615 24% (99) % (58) %
Food & beverage revenue 144 11% 7,407 10% 5,755 12% 13,468 10% (98) % (57) %
Advertising and other
revenue 118 10% 1,613 2% 1,584 3% 2,956 2% (93) % (46) %
$ 500 41% $ 25,599 35% $ 20,087 41% $ 47,039 36% (98) % (57) %
New
Zealand Admissions revenue $ 138 11% $ 3,881 5% $ 2,403 5% $ 6,873 5% (96) % (65) %
Food & beverage revenue 67 6% 1,621 2% 1,051 2% 2,930 2% (96) % (64) %
Advertising and other
revenue 43 3% 321 1% 211 1% 533 1% (87) % (60) %
$ 248 20% $ 5,823 8% $ 3,665 8% $ 10,336 8% (96) % (65) %
Total revenue $ 1,217 100% $ 72,296 100% $ 47,527 100% $ 130,223 100% (98) % (64) %
OPERATING EXPENSE
United Film rent and advertising
States cost $ (11) 1% $ (13,650) 19% $ (7,268) 16% $ (23,773) 18% 100 % 69 %
Food & beverage cost (188) 15% (2,988) 4% (2,008) 4% (5,310) 4% 94 % 62 %
Occupancy expense (6,791) 558% (6,886) 10% (13,377) 27% (13,831) 11% 1 % 3 %
Other operating expense (2,888) 237% (11,389) 15% (12,129) 26% (21,563) 17% 75 % 44 %
$ (9,878) 811% $ (34,913) 48% $ (34,782) 72% $ (64,477) 50% 72 % 46 %
Film rent and advertising
Australia cost $ (142) 12% $ (8,029) 11% $ (5,607) 12% $ (14,307) 11% 98 % 61 %
Food & beverage cost (107) 9% (1,406) 2% (1,262) 2% (2,521) 2% 92 % 50 %
Occupancy expense (1,799) 148% (3,971) 5% (5,687) 12% (7,934) 6% 55 % 28 %
Other operating expense (1,139) 95% (5,366) 8% (6,526) 14% (10,781) 8% 79 % 39 %
$ (3,187) 262% $ (18,772) 26% $ (19,082) 40% $ (35,543) 27% 83 % 46 %
New Film rent and advertising
Zealand cost $ (45) 4% $ (1,894) 3% $ (1,101) 2% $ (3,231) 2% 98 % 66 %
Food & beverage cost (25) 1% (326) 0% (220) 1% (618) 1% 92 % 64 %
Occupancy expense (255) 21% (907) 1% (1,074) 2% (1,711) 1% 72 % 37 %
Other operating expense (368) 30% (1,274) 2% (1,475) 3% (2,699) 2% 71 % 45 %
$ (693) 57% $ (4,401) 6% $ (3,870) 8% $ (8,259) 6% 84 % 53 %
Total operating expense $ (13,758) 1130% $ (58,086) 80% $ (57,734) 120% $ (108,279) 83% 76 % 47 %
DEPRECIATION, AMORTIZATION, GENERAL AND
ADMINISTRATIVE EXPENSE
United Depreciation and
States amortization $ (1,988) 163% $ (2,516) 3% $ (4,008) 9% $ (5,141) 4% 21 % 22 %
General and administrative
expense (700) 58% (432) 1% (1,567) 3% (1,036) 1% (62) % (51) %
$ (2,688) 221% $ (2,948) 4% $ (5,575) 12% $ (6,177) 5% 9 % 10 %
Depreciation and
Australia amortization $ (1,421) 117% $ (1,222) 1% $ (2,814) 6% $ (2,403) 1% (16) % (17) %
General and administrative
expense (229) 19% (467) 1% (600) 1% (854) 1% 51 % 30 %
$ (1,650) 136% $ (1,689) 2% $ (3,414) 7% $ (3,257) 2% 2 % (5) %
New Depreciation and
Zealand amortization $ (355) 29% $ (352) 1% $ (721) 2% $ (703) 1% (1) % (3) %
General and administrative
expense (20) 2% (39) 0% 9 (0)% (39) 0% 49 % >100 %
$ (375) 31% $ (391) 1% $ (712) 1% $ (742) 1% 4 % 4 %
Total depreciation, amortization,
general and administrative expense $ (4,713) 387% $ (5,028) 7% $ (9,701) 21% $ (10,176) 8% 6 % 5 %
OPERATING INCOME (LOSS) - CINEMA
United States $ (12,097) (994)% $ 3,013 4% $ (16,582) (35)% $ 2,193 2% (>100) % (>100) %
Australia (4,337) (356)% 5,138 7% (2,409) (5)% 8,239 6% (>100) % (>100) %
New Zealand (820) (66)% 1,031 2% (917) (2)% 1,335 1% (>100) % (>100) %
Total Cinema operating income (loss)
13% $ (19,908) (42)% $ 11,767 9% (>100) % (>100) %
Second Quarter Results
Cinema Segment operating income
Cinema segment operating income for the second quarter 2020 decreased by$26.4 million , to a loss of$17.3 million when compared to the same period in 2019. This significant decrease is due to the temporary closure of our cinemas due to the COVID-19 pandemic, and partially mitigated by (i) the re-opening of most of ourAustralia and all of ourNew Zealand theaters (other than our cinema at Courtenay Central) in June of 2020, (ii) the absence of internal rent revenue from our fee-interest cinemas due to the COVID-19 shutdowns, and (iii) the rent abatements from a number of our landlords.
Revenue
Cinema revenue decreased by 98%, or
46--------------------------------------------------------------------------------
Below are the changes in our cinema revenue by market:
?U.S. cinema revenue decreased by 99%, or$40.4 million , to$0.5 million for the second quarter 2020, due to a 100% decrease in attendance. These decreases were due to the ongoing temporary closures of ourU.S. Cinemas as a result of the COVID-19 pandemic, and the temporary closure of ourConsolidated Theatre at theKahala Mall inHonolulu since December of 2019 for renovations. ?Australia cinema revenue decreased by 98%, or$25.1 million , to$0.5 million for the second quarter 2020, due to a 99% decrease in attendance. These decreases were due to the ongoing temporary closures of our cinemas inAustralia as a result of the COVID-19 pandemic partially mitigated by the re-opening of most of our cinemas inAustralia in June of 2020. These results were further impacted by the decline in value of the Australian dollar and a lack of new major studio tentpole releases upon re-opening. ?New Zealand cinema revenue decreased by 96%, or$5.6 million , to$0.2 million for the second quarter 2020, due to a 96% decrease in attendance. These decreases were due to the ongoing temporary closures of our cinemas inNew Zealand as a result of the COVID-19 pandemic partially mitigated by the re-opening of our cinemas inNew Zealand in June of 2020, excluding Courtenay Central. These results were further impacted by the decline in value of theNew Zealand dollar and a lack of new major studio releases upon re-opening.
Operating expense
Operating expense for the second quarter 2020, decreased by 76%, or$44.3 million , to$13.8 million , principally due to the ongoing temporary closures of our cinemas as a result of the COVID-19 pandemic. InAustralia and New Zealand , we have enjoyed the benefits of wage subsidies provided by their respective governments, which have covered, and continue to cover, a high proportion of the costs of our cinema level personnel inAustralia and virtually all of the costs of our cinema level personnel inNew Zealand . The wage subsidy programs inAustralia and New Zealand are currently scheduled to continue throughSeptember 25, 2020 andAugust 11, 2020 , respectively. The wage subsidy program inAustralia is to be extended but has yet to be codified. This decline was also due to savings in internal and external rent abatements received in the second quarter of 2020 as a result of the COVID-19 pandemic.
Operating expense as a percentage of gross revenue has increased over 100 percentage points for the second quarter 2020, compared to 80% in the same period in 2019, due to the significantly lower revenue in our box office and the fact that certain of our occupancy costs are generally fixed and cannot be adjusted to reflect such lower admission levels.
Depreciation, amortization, general and administrative expense
Depreciation, amortization, general and administrative expense for the second quarter 2020, decreased by 6%, or$0.3 million , to$4.7 million , compared to the same period in 2019. This decrease is attributable to a reduction in depreciation expense for ourU.S. cinemas digital projector lease, which has been substantially depreciated by the end of 2019, offset by an increase in legal fees. Total depreciation, amortization, general and administrative expense were partially reduced by the foreign exchange movements inAustralia and New Zealand . Six Months Results
Cinema Segment operating income
Cinema segment operating income for the six months endedJune 30, 2020 decreased by$31.7 million , to a loss of$19.9 million when compared to the same period in 2019. This decrease is due to (i) reduced seating occupancy as a result of social distancing measures, and (ii) the ongoing temporary closure of our cinemas, which both led to a significant attendance drop sinceMarch 2020 , partially mitigated by the re-opening of most of ourAustralia and New Zealand theaters in June of 2020. Revenue
Cinema revenue decreased by 64%, or
47--------------------------------------------------------------------------------
Below are the changes in our cinema revenue by market:
?U.S. cinema revenue decreased by 67%, or$49.1 million , to$23.8 million for the six months endedJune 30, 2020 , due to a 70% decrease in attendance. These decreases were significantly due to the social distancing measures put in place and the ongoing temporary closures since lateMarch 2020 of ourU.S. Cinemas as a result of the COVID-19 pandemic, the temporary closure of ourConsolidated Theatre at theKahala Mall inHonolulu since December of 2019 for renovations, and the closures of our86th Street ,Paris , andBeekman cinemas since mid-2019. ?Australia cinema revenue decreased by 57%, or$27.0 million , to$20.1 million for the six months endedJune 30, 2020 , due to a 59% decrease in attendance. These decreases were significantly due to the ongoing temporary closures of our cinemas inAustralia as a result of the COVID-19 pandemic partially mitigated by the re-opening of most of our cinemas inAustralia in June of 2020. These results were further impacted by the decline in value of the Australian dollar. ?New Zealand cinema revenue decreased by 65%, or$6.7 million , to$3.7 million for the six months endedJune 30, 2020 , due to a 65% decrease in attendance. These decreases were significantly due to the temporary closures of our cinemas inNew Zealand as a result of the COVID-19 pandemic partially mitigated by the re-opening of our cinemas inNew Zealand in June of 2020, excluding Courtenay Central, which remains closed due to seismic concerns. These results were further impacted by the decline in value of theNew Zealand dollar.
Operating expense
Operating expense for the six months endedJune 30, 2020 , decreased by 47%, or$50.5 million , to$57.7 million , due to the temporary closures of our cinemas as a result of the COVID-19 pandemic, which for ourU.S. cinemas and a portion of our Australian cinemas continues to be ongoing. The temporary closures of our cinemas ultimately led to employee terminations in late March in theU.S. resulting in a reduction in labor costs. InAustralia and New Zealand , we did not need to terminate employees as we have enjoyed the benefits of wage subsidies provided by their respective governments, which have covered, and continue to cover, virtually all of the costs of our cinema level personnel. The wage subsidy programs inAustralia and New Zealand are currently scheduled to continue throughSeptember 25, 2020 andAugust 11, 2020 , respectively. The wage subsidy program inAustralia is to be extended but has yet to be codified. We did not, unfortunately, qualify for the Paycheck Protection Program in theU.S. This decline was also due to savings in internal and external rent abatements received in the second quarter of 2020 as a result of the COVID-19 pandemic. Operating expense as a percentage of gross revenue has increased by 37 percentage points, to 120% for the six months endedJune 30, 2020 , compared to 83% in the same period in 2019, due to the significantly lower revenue in our box office and the fact that certain of our occupancy costs are generally fixed and cannot be adjusted to reflect such lower admission levels.
Depreciation, amortization, general and administrative expense
Depreciation, amortization, general and administrative expense for the six months endedJune 30, 2020 , decreased by 5%, or$0.5 million , to$9.7 million , compared to the same period in 2019. This decrease is attributable to a reduction in depreciation expense for ourU.S. cinemas digital projector lease, which has been substantially depreciated by the end of 2019 and a decrease in legal fees. Total depreciation, amortization, general and administrative expense were partially reduced by the foreign exchange movements inAustralia and New Zealand . 48
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Real Estate
The following table details our real estate segment operating results for the
quarter and six months ended
% Change
Quarter Ended Six Months Ended Fav/(Unfav)
June 30, % of
?2020 ?Revenue ?2019 ?Revenue ?2020 ?Revenue ?2019 ?Revenue Ended Ended
REVENUE
Live theatre rental and
United States ancillary income $ 206 9% $ 831 15% $ 780 11% $ 1,767 16% (75) % (56) %
Property rental income 100 4% 49 1% 152 2% 101 1% >100 % 50 %
306 13% 880 16% 932 13% 1,868 17% (65) % (50) %
Australia Property rental income 1,911 83% 4,052 73% 5,489 80% 7,967 72% (53) % (31) %
New Zealand Property rental income 86 4% 632 11% 484 7% 1,159 11% (86) % (58) %
Total revenue $ 2,303 100% $ 5,564 100% $ 6,905 100% $ 10,994 100% (59) % (37) %
OPERATING EXPENSE
United States Live theatre cost $ (132) 6% $ (297) 6% $ (474) 7% $ (596) 5% 56 % 20 %
Property cost (195) 8% (156) 3% (817) 12% (314) 3% (25) % (>100) %
Occupancy expense (162) 7% (128) 2% (321) 4% (278) 3% (27) % (15) %
(489) 21% (581) 11% (1,612) 23% (1,188) 11% 16 % (36) %
Australia Property cost (429) 19% (787) 14% (1,080) 16% (1,488) 14% 45 % 27 %
Occupancy expense (368) 16% (664) 12% (952) 14% (1,356) 12% 45 % 30 %
(797) 35% (1,451) 26% (2,032) 30% (2,844) 26% 45 % 29 %
New Zealand Property cost (200) 9% (268) 5% (499) 7% (566) 5% 25 % 12 %
Occupancy expense (103) 4% (138) 2% (206) 3% (285) 2% 25 % 28 %
(303) 13% (406) 7% (705) 10% (851) 7% 25 % 17 %
Total operating expense $ (1,589) 69% $ (2,438) 44% $ (4,349) 63% $ (4,883) 44% 35 % 11 %
DEPRECIATION, AMORTIZATION, GENERAL AND ADMINISTRATIVE
EXPENSE
Depreciation and
United States amortization $ (203) 9% $ (194) 4% $ (405) 6% $ (390) 4% (5) % (4) %
General and administrative
expense (199) 8% (178) 3% (390) 6% (337) 3% (12) % (16) %
(402) 17% (372) 7% (795) 12% (727) 7% (8) % (9) %
Depreciation and
Australia amortization $ (845) 37% $ (911) 16% $ (1,708) 25% $ (1,837) 16% 7 % 7 %
General and administrative
expense (74) 3% (248) 5% (242) 3% (540) 5% 70 % 55 %
(919) 40% (1,159) 21% (1,950) 28% (2,377) 21% 21 % 18 %
Depreciation and
New Zealand amortization (227) 10% (249) 4% (462) 6% (504) 5% 9 % 8 %
General and administrative
expense 27 (1)% (1) 0% 31 (0)% (1) 0% >100 % >100 %
(200) 9% (250) 4% (431) 6% (505) 5% 20 % 15 %Total depreciation, amortization, general and
administrative expense$ (1,521) 66%
United States$ (585) (25)%$ (73) (1)%$ (1,475) (21)%$ (47) (0)% (>100) % (>100) % Australia 195 8% 1,442 26% 1,507 21% 2,746 25% (86) % (45) % New Zealand (417) (18)% (24) (1)% (652) (9)% (197) (2)% (>100) % (>100) % Total real estate operating income (loss)$ (807) (35)%$ 1,345 24%$ (620) (9)%$ 2,502 23% (>100) % (>100) % Second Quarter Results Real Estate Segment Income Real estate segment operating income decreased by$2.2 million , to a loss of$0.8 million for the quarter endedJune 30, 2020 compared toJune 30, 2019 , due to the abatements and lower intercompany rent revenue from our fee-interest cinemas along with the government prohibition of live stage presentations in indoor venues in theU.S. This decline was further impacted by the unfavorable foreign currency movements in bothAustralia and New Zealand , partially offset by payments from portions of license fees of ourLive Theatre agreements and by a decrease in operating expense.
Revenue
Real estate revenue for the second quarter of 2020 decreased by 59%, or$3.3 million , to$2.3 million compared to the second quarter of 2019, due to the ongoing pandemic which resulted in the closure of ourU.S. Live Theatres . Further, referring to our Australian real estate revenue, a federal government Code of Conduct was prepared as a guiding reference for landlords and tenants to assist rental negotiations in regard to abatements. In addition, state governments have enacted laws to legislate rental relief for eligible tenants, and while the Code of Conduct is often reflected, in part, in this legislation, the states have also decided to draft the legislation at their discretion. Consistent in the various legislation is a rent relief element with reference to tenancy sales volumes, especially in situations of enforced closure. In addition to that, a weakening foreign currency exchange rate in the Australian andNew Zealand dollars also contributed to the decline in revenue.
Operating Expense
Operating expense for the quarter endedJune 30, 2020 decreased by 35%, or$0.8 million , to$1.6 million , compared to the second quarter endedJune 30, 2019 , due to the COVID-19 pandemic. Throughout the second quarter of 2020, all capital costs and many operating expenses were significantly reduced and various projects and maintenance works were postponed. Further, inAustralia , various State Revenue Offices (SRO) implemented support measures for commercial landlords whereby land tax relief was provided by way of a percentage of land tax waiver. 49
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Depreciation, Amortization, General and Administrative Expense
Depreciation, amortization, general and administrative expense for the quarter endedJune 30, 2020 decreased 15%, or$0.3 million , to$1.5 million compared to the second quarter endedJune 30, 2019 , due to a foreign-owner surcharge forgiveness inQueensland, Australia for the twelve months endedJune 2020 , that reversed in the second quarter of 2020 as part of the COVID-19 relief program. Six Month Results Real Estate Segment Income Real estate segment operating income decreased by$3.1 million , to a loss of$0.6 million for the six months endedJune 30, 2020 , compared to the same period in 2019. This decrease is attributable to the temporary closures of ourU.S. Live Theatres because of the COVID-19 pandemic. This decline was partially offset by decreases in operating expenses in theU.S. Live Theatres ,Australia, and New Zealand . In addition to that, a weakening foreign currency exchange rate also contributed to the decline in operating income.
Revenue
Real estate revenue for the six months endedJune 30, 2020 decreased by 37%, or$4.1 million , to$6.9 million , due to the ongoing temporary closure of ourLive Theatres , further impacted by the unfavorable foreign currency movements in bothAustralia and New Zealand . Operating Expense Operating expense for the six months endedJune 30, 2020 decreased by 11%, or$0.5 million , to$4.3 million , due to a decrease in occupancy expense in ourAustralia and New Zealand segments.
Depreciation, Amortization, General and Administrative Expense
Depreciation, amortization, general and administrative expense for the six
months ended
LIQUIDITY AND CAPITAL RESOURCES
In response to uncertainties associated with the outbreak of the COVID-19 pandemic and its impact on our Company's business, management, as ofJune 30, 2020 , had drawn-down the available operating borrowing capacity in the first quarter of 2020. Total outstanding borrowings were$275.9 million atJune 30, 2020 . Our Company's use of these funds is in some ways limited due to limitations on the expatriation of funds fromAustralia and New Zealand tothe United States and limitations on our use of proceeds from our$55.0 million Bank of America Credit Facility for purposes unrelated to ourU.S. cinema activities. The coronavirus outbreak has materially adversely affected the economies (and cinema exhibition in particular) ofthe United States ,Australia, and New Zealand . Outbreaks of COVID-19 have caused cinemas and other public assembly venues to close. To comply with the rules, guidelines, and recommendations enacted by local, state, and federal government authorities, we temporarily closed all of our cinemas in March of 2020. While our cinemas inNew Zealand are now re-opened without social distancing guidelines, most of our Australian cinemas have re-opened and continue to abide by social distancing guidelines. However, onJuly 8, 2020 , we had to close six of our seven theaters in the state ofVictoria , due to a spike in new COVID-19 cases, as the local government has ordered a minimum six-week closure. OnAugust 5, 2020 , the seventh cinema also had to be closed as the state went into full lockdown, which is currently proposed to last throughmid-September 2020 . Cinema attendance is driven by film. Certain major studios have announced the delayed release of major motion pictures. While we currently anticipate the release of such major motion pictures to resume during the third and fourth quarters of 2020 and beyond, no assurances can be given as this is something over which we have no control. The delayed releases of major motion pictures, assuming the effects of the COVID-19 pandemic are surmounted, 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 the re-opening of our venues inAustralia and New Zealand , we have implemented an extensive set of new protocols to protect the health and well-being of our employees. Such employee protocols, include, without limitation, (i) creating work spaces that take into account social distancing requirements and recommendations, (ii) the installation of plexiglass shields at concession and ticket stations, (iii) the reduction of areas where cash can be accepted, and (iv) increased cleaning and sanitization standards. Additionally, inAustralia and New Zealand , we are complying with all governmentally mandated contact tracing requirements. In theU.S. , we are developing substantially similar protocols for the employees at our cinemas and live theaters, and we will require that employees wear masks during their shifts. 50
-------------------------------------------------------------------------------- With respect to our home office employees, the Company is similarly developing a new set of protocols for implementation in the office environment. As of the date of filing of this Form 10-Q, our home offices inCulver City, CA ,New York City , NY,Wellington, New Zealand andMelbourne, Australia have not been officially re-opened.
The impact of the COVID-19 pandemic on our business has reduced our liquidity and our management, consequently, has postponed, or reprioritized capital expenditures based on assessments of conditions and liquidity requirements.
Our bank loans 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 (but no assurances can be given) to be able to obtain an amendment or waiver from its lenders. In the absence of such waivers, it is our current intention to look to our real estate assets to provide needed liquidity. We, for example, have retained Newmark Knight Frank to assist us in the refinancing of the construction loan on our44 Union Square property. That 73,113 net rentable square foot retail and office property located onUnion Square inManhattan , is substantially completed and in the lease up phase. Total debt against that property aggregates less than$40.0 million . Our 202-acreCoachella property is unencumbered. That property is currently zoned for residential and mixed-use purposes. Our 70+ acre Manukau/Wiri industrial property (next to theAuckland Airport ) is likewise unencumbered. Unlike pure cinema exhibition companies, we own the fee interest under all of our live theatres, and in 12 of our cinemas. 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 re-open, 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 our44 Union Square property inManhattan and the refurbishment of ourConsolidated Theatre at theKahala Mall inHonolulu .44 Union Square is substantially completed and in the lease up phase. We anticipate that ourConsolidated Theatre at theKahala Mall will re-open for business within a few weeks after the construction is completed, which should be about a few months of work following re-commencement of construction after relaxation of COVID-19 related government restrictions. Our pre-COVID-19 business plan with respect to the Real Estate segment of our business was to continue the build-out of ourNewmarket Village and Auburn ETCs inAustralia ; to master-plan and consider the redevelopment of our Courtenay Central site inNew Zealand into an urban entertainment center with a focus on cinema exhibition, food and beverage, and grocery store uses; 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. Currently, we have determined to postpone further consideration of any redevelopment of our Cinemas 1,2,3 property until we better understand the impact of the COVID-19 pandemic on our assets and the market. However, we continue to advance the planning of our remaining projects. 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 have 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 our options 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. We, however, remain confident in our cinema industry, and that it will once again be the primary engine through which we fund our liquidity needs. AtJune 30, 2020 , our consolidated cash and cash equivalents totaled$40.4 million . Of this amount,$22.9 million ,$3.8 million , and$13.7 million were held by ourU.S. , Australian, andNew Zealand operations, respectively. Due to the impact of COVID-19, we do not intend to indefinitely reinvest offshore any earnings derived from our Australian andNew Zealand operations. 51
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The changes in cash and cash equivalents for the six months ended
Six Months Ended
June 30,
(Dollars in thousands) 2020 2019 % Change
Net cash provided by (used in) operating
activities$ (23,126) $ 3,058
(>100) %
Net cash provided by (used in) investing
activities (14,011) (23,965)
42 %
Net cash provided by (used in) financing
activities 63,155 16,485
>100 %
Effect of exchange rate changes on cash and
cash equivalents 2,211 (189)
>100 %
Increase (decrease) in cash and cash
equivalents$ 28,229 $ (4,611) >100 % Operating activities Cash used in operating activities for the six months endedJune 30, 2020 increased by$26.2 million , to net cash used of$23.1 million driven by$29.7 million lower cash inflows from operating activities as well as a$3.5 million decrease in net operating assets.
Investing activities
Cash used in investing activities during the six months endedJune 30, 2020 decreased by$10.0 million compared to the same period in 2019, to net cash used of$14.0 million . This decrease is due to the suspension of our cinema refurbishment activities due to the COVID-19 shutdown when compared to the same period in 2019. Financing activities
The
OnMarch 10, 2020 , the Board increased the stock repurchase program capacity by$25.0 million and extended it toMarch 2, 2022 . AtJune 30, 2020 , there was$26.0 million of capacity remaining in that authorization. During the first six months of 2020, we repurchased 75,157 shares of our Class A Non-Voting Common Stock, at an average price of$8.92 . These purchases occurred in the first quarter of 2020. In view of the need to garner our financial resources, for the foreseeable future our stock repurchase program will likely take a lower capital allocation priority. Prior to the COVID-19 pandemic, we have used cash generated from operations and other excess cash, to the extent not needed for any capital investment, to pay down our loans and credit facilities providing us some flexibility on our available loan facilities for future use and thereby, reducing interest charges. As a part of our COVID-19 planning, we have determined to maintain significant cash balances, and have accordingly fully drawn-down on all our available operating bank lines. ? 52
-------------------------------------------------------------------------------- The table below presents the changes in our total available resources (cash and borrowings), debt-to-equity ratio, working capital, and other relevant information addressing our liquidity for the second quarter endedJune 30, 2020 and preceding four years: As of and for the 6-Months Ended Year Ended December 31 ($ in thousands) June 30, 2020 2019 2018(3) 2017(2)(3) 2016(2) Total Resources (cash and borrowings) Cash and cash equivalents (unrestricted)$ 40,364 $ 12,135 $ 13,127 $ 13,668 $ 19,017 Unused borrowing facility 10,494 73,920 85,886 137,231 117,599 Restricted for capital projects(1) 10,494 13,952 30,318 62,280 62,024 Unrestricted capacity - 59,968 55,568 74,951 55,575 Total resources at period end 50,858 86,055 99,013 150,899 136,616 Total unrestricted resources at period end 40,364 72,103 68,695 88,619 74,592 Debt-to-Equity Ratio Total contractual facility$ 286,407 $ 283,138 $ 252,929 $ 271,732 $ 266,134 Total debt (gross of deferred financing costs) 275,913 209,218 167,043 134,501 148,535 Current 40,331 37,380 30,393 8,109 567 Non-current 235,582 171,838 136,650 126,392 147,968 Finance lease liabilities 143 209 - - - Total book equity 105,586 139,616 179,979 181,382 146,890 Debt-to-equity ratio 2.61 1.50 0.93 0.74 1.01 Changes in Working Capital Working capital (deficit)(4)$ (54,944) $ (84,138) $ (56,047) $ (47,294) $ 6,655 Current ratio 0.51 0.24 0.35 0.41 1.10 Capital Expenditures (including acquisitions)$ 13,948 $ 47,722 $
56,827
(1)This relates to the construction facilities specifically negotiated for: (i)44 Union Square redevelopment project, obtained inDecember 2016 , and (ii)New Zealand construction projects, obtained inMay 2015 . TheNew Zealand construction loan expiredDecember 31, 2018 . (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 Accounting Policies - Prior Period Financial Statements Correction of Immaterial Errors of the 2019 Form 10-K 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
CONTRACTUAL OBLIGATIONS, COMMITMENTS AND CONTINGENCIES
The following table provides information with respect to the maturities and
scheduled principal repayments of our recorded contractual obligations and
certain of our commitments and contingencies, either recorded or off-balance
sheet, as of
(Dollars in thousands) 2020 2021 2022 2023 2024 Thereafter Total Debt(1)$ 40,020 $ 846 $ 24,260 $ 171,626 $ 293 $ 7,910 $ 244,955 Operating leases, including imputed interest 15,819 32,010 32,018 31,292 29,466 159,647 300,252 Finance leases, including imputed interest 31 53 42 28 - - 154 Subordinated debt(1) 326 676 711 747 585 27,913 30,958 Pension liability 342 684 684 684 684 1,867 4,945 Estimated interest on debt (2) 4,932 7,224 6,397 4,551 1,690 3,987 28,781 Village East purchase option(3) - 5,900 - -
- - 5,900 Total$ 61,470 $ 47,393 $ 64,112 $ 208,928 $ 32,718 $ 201,324 $ 615,945
(1)Information is presented gross of deferred financing costs.
(2)Estimated interest on debt is based on the anticipated loan balances for future periods and current applicable interest rates.
(3)Represents the lease liability of the option associated with the ground lease purchase of the Village East Cinema.
Refer to Note 14 - Commitments and Contingencies for additional information.
Litigation
We are currently involved in certain legal proceedings and, as required, have accrued estimates of probable and estimable losses for the resolution of these claims. Where we are the plaintiffs, we expense all legal fees on an ongoing basis and make no provision for any potential settlement amounts until received. InAustralia , the prevailing party is usually entitled to recover its attorneys' fees, which recoveries typically work out to be approximately 60% of the amounts actually spent where first-class legal counsel is engaged at customary rates. Where we are a plaintiff, we have likewise made no provision for the liability for the defendant's attorneys' fees in the event we are determined not to be the prevailing party. 53
-------------------------------------------------------------------------------- Where we are the defendants, we accrue for probable damages that insurance may not cover as they become known and can be reasonably estimated. In our opinion, any claims and litigation in which we are currently involved are not reasonably likely to have a material adverse effect on our business, results of operations, financial position, or liquidity. It is possible, however, that future results of the operations for any particular quarterly or annual period could be materially affected by the ultimate outcome of the legal proceedings. Please refer to Item 3 - Legal Proceedings in our 2019 Form 10-K for more information. There have been no material changes to our litigation since our 2019 Form 10-K, except as set forth in Note 14 - Commitments and Contingencies in the accompanying consolidated financial statements included in this Form 10-Q.
Off-Balance Sheet Arrangements
See Note 14 - Commitments and Contingencies to the Consolidated Financial Statements included herein on this report, there are no off-balance sheet arrangements or obligations (including contingent obligations) that have, or are reasonably likely to have, a current or future material effect on our financial condition, changes in the financial condition, revenue or expense, results of operations, liquidity, capital expenditures or capital resources.
CRITICAL ACCOUNTING POLICIES
We believe that the application of the following accounting policies requires significant judgments and estimates in the preparation of our Consolidated Financial Statements and hence, are critical to our business operations and the understanding of our financial results: (i) Impairment of Long-lived Assets (other thanGoodwill and Intangible Assets with indefinite lives) - we evaluate our long-lived assets and finite-lived intangible assets using historical and projected data of cash flows as our primary indicator of potential impairment and we take into consideration the seasonality of our business. If the sum of the estimated, undiscounted future cash flows is less than the carrying amount of the asset, then an impairment is recognized for the amount by which the carrying value of the asset exceeds its estimated fair value based on an appraisal or a discounted cash flow calculation. For certain non-income producing properties or for those assets with no consistent historical or projected cash flows, we obtain appraisals or other evidence to evaluate whether there are impairment indicators for these assets.
No impairment losses were recorded for long-lived and finite-lived intangible
assets for the six months ended
(ii) Impairment ofGoodwill and Intangible Assets with indefinite lives - goodwill and intangible assets with indefinite useful lives are not amortized, but instead, tested for impairment at least annually on a reporting unit basis. The impairment evaluation is based on the present value of estimated future cash flows of each reporting unit plus the expected terminal value. There are significant assumptions and estimates used in determining the future cash flows and terminal value. The most significant assumptions include our cost of debt and cost of equity assumptions that comprise the weighted average cost of capital for each reporting unit. Accordingly, actual results could vary materially from such estimates.
No impairment losses were recorded for goodwill and indefinite-lived intangible
assets for the second quarter ended
?
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FINANCIAL RISK MANAGEMENT
International Business Risks
Our international operations are subject to a variety of risks, including the following:
?Currency Risk: while we report our earnings and net assets inU.S. dollars, substantial portions of our revenue and of our obligations are denominated in either Australian orNew Zealand dollars. The value of these currencies can vary significantly compared to theU.S. dollar and compared to each other. We do not hedge the currency risk, but rather have relied upon the natural hedges that exist as a result of the fact that our film costs are typically fixed as a percentage of the box office, and our local operating costs and obligations are likewise typically denominated in local currencies. However, we do have intercompany debt and our ability to service this debt could be adversely impacted by declines in the relative value of the Australian andNew Zealand dollar compared to theU.S. dollar. Also, our use of local borrowings to mitigate the business risk of currency fluctuations has reduced our flexibility to move cash between jurisdictions. Set forth below is a chart of the exchange ratios between these three currencies since 1996: [[Image Removed: Picture 3]] In recent periods, we have repaid intercompany debt and used the proceeds to fund capital investment inthe United States . Accordingly, our debt levels inAustralia 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 theU.S. dollar versus the Australian Dollar and/or theNew Zealand dollar would effectively raise the overall cost of our borrowing and capital and make it more expensive to return funds fromthe United States toAustralia and New Zealand . ?Risk of adverse government regulation: currently, we believe that relations betweenthe United States ,Australia, and New Zealand are good. However, no assurances can be given that these relationships will continue, and thatAustralia and New Zealand will not in the future seek to regulate more highly the business done byU.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). Our exposure to interest rate risk arises out of our intermediate term floating-rate borrowings. To manage the risk, we utilize interest rate derivative contracts to convert certain floating-rate borrowings into fixed-rate borrowings. It is the Company's policy to enter into interest rate derivative transactions only to the extent considered necessary to meet its objectives as stated above. The Company does not enter into these transactions or any other hedging transactions for speculative purposes. 55
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Inflation
We continually monitor inflation and the effects of changing prices. Inflation increases the cost of goods and services used. Competitive conditions in many of our markets restrict our ability to recover fully the higher costs of acquired goods and services through price increases. We attempt to mitigate the impact of inflation by implementing continuous process improvement solutions to enhance productivity and efficiency and, as a result, lower costs and operating expenses. The effects of inflation have not had a material impact on our operations and the resulting financial position or liquidity.
FORWARD-LOOKING STATEMENTS
Our statements in this quarterly report contain a variety of forward-looking statements as defined by the Securities Litigation Reform Act of 1995, including those related to the expected timing of the re-opening of our cinemas and theatres and the completion and opening of the44 Union Square project inNew York City , including an issuance of a core and shell temporary certificate of occupancy thereof; our belief regarding the attractiveness of the44 Union Square project to potential tenants; our expectations regarding the commencement of rental income on our office building; our expectations regarding the resiliency of the industrial property sector inNew Zealand ; our expectations regarding our stock repurchase program; our expectations regarding credit facility covenant compliance and our ability to continue to obtain necessary covenant waivers; and our expectations of our liquidity and capital requirements and the allocation of funds. Forward-looking statements reflect only our expectations regarding future events and operating performance and necessarily speak only as of the date the information was prepared. No guarantees can be given that our expectation will in fact be realized, in whole or in part. You can recognize these statements by our use of words, such as "may," "will," "expect," "believe," and "anticipate" or other similar terminology. These forward-looking statements reflect our expectation after having considered a variety of risks and uncertainties. However, they are necessarily the product of internal discussion and do not necessarily completely reflect the views of individual members of our Board of Directors or of our management team. Individual Board members and individual members of our management team may have different views as to the risks and uncertainties involved and may have different views as to future events or our operating performance.
Among the risks, uncertainties, and other factors that could cause actual results to differ materially from those expressed in or underlying our forward-looking statements are the following:
?with respect to our cinema operations:
?the adverse impact of the COVID-19 pandemic which resulted in the temporary shutdown of our global theaters beginning inMarch 2020 , and the adverse effects such pandemic may continue to have on our anticipated cinema re-opening dates and on the dates that public performances will resume in our live theatres inNew York City andChicago ;
?the adverse effects of the COVID-19 pandemic on the Company's results from operations, liquidity, cash flows, financial condition, and access to credit markets;
?the adverse impact of the COVID-19 pandemic on short-term and/or long-term entertainment, leisure and discretionary spending habits and practices of our patrons;
?the decrease in attendance at our cinemas and theatres after they have re-opened due to (i) continued safety and health concerns, (ii) a change in consumer behavior in favor of alternative forms of entertainment, or (iii) additional regulatory requirements limiting our seating capacity;
?reduction in operating margins (or negative operating margins) due to the implementation of social distancing and other health and safety protocols;
?potentially uninsurable liability exposure to customers and staff should they become (or allege that they have become) infected with COVID-19 while at one of our facilities;
?unwillingness of employees to report to work due to the adverse effects of the COVID-19 pandemic or to otherwise conduct work under any revised work environment protocols;
?the adverse impact that the COVID-19 pandemic may have on the national and global macroeconomic environment;
?competition from cinema operators who have successfully used debtor laws to reduce their debt and/or rent exposure;
?the uncertainty as to the scope and extent of government responses to the COVID-19 pandemic;
?the disruptions or reductions in the utilization of entertainment, shopping, and hospitality venues, as well as in our operations, due to pandemics, epidemics, widespread health emergencies, or outbreaks of infectious diseases such as the coronavirus, or to changing consumer tastes and habits;
?the number and attractiveness to moviegoers of the films released in future periods, and potential changes in release dates for motion pictures;
?the lack of availability of films in the short- or long-term as a result of (i) major film distributors releasing scheduled films on alternative channels or (ii) disruptions of film production;
?the amount of money spent by film distributors to promote their motion pictures;
?the licensing fees and terms required by film distributors from motion picture exhibitors in order to exhibit their films;
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?the comparative attractiveness of motion pictures as a source of entertainment and willingness and/or ability of consumers (i) to spend their dollars on entertainment and (ii) to spend their entertainment dollars on movies in an outside-the-home environment;
?the extent to which we encounter competition from other cinema exhibitors, from other sources of outside-the-home entertainment, and from inside-the-home entertainment options, such as "home theaters" and competitive film product distribution technology, such as, streaming, cable, satellite broadcast, Blu-ray/DVD rentals and sales, and so called "movies on demand";
?the impact of certain competitors' subscription or advance pay programs;
?the cost and impact of improvements to our cinemas, such as improved seating, enhanced food and beverage offerings, and other improvements;
?the ability to negotiate favorable rent payment terms with our landlords;
?disruptions during theater improvements;
?the extent to, and the efficiency with, which we are able to integrate acquisitions of cinema circuits with our existing operations;
?in the
?the risk of damage and/or disruption of cinema businesses from earthquakes as certain of our operations are in geologically active areas; and
?the impact of protests, demonstrations, and civil unrest on, among other things, government policy, consumer willingness to go to the movies, and the spread of COVID-19.
?with respect to our real estate development and operation activities:
?the impact of the COVID-19 pandemic may continue to affect many of our tenants at our real estate operations inthe United States ,Australia, and New Zealand , their ability to pay rent, and to stay in business;
?the impact of the COVID-19 pandemic on our construction projects and on our ability to open construction sites and to secure needed labor and materials;
?uncertainty as to governmental responses to COVID-19;
?the potential sale of certain non-core real estate assets;
?the rental rates and capitalization rates applicable to the markets in which we operate and the quality of properties that we own;
?the ability to negotiate and execute lease agreements with material tenants;
?the extent to which we can obtain on a timely basis the various land use approvals and entitlements needed to develop our properties;
?the risks and uncertainties associated with real estate development;
?the availability and cost of labor and materials;
?the ability to obtain all permits to construct improvements;
?the ability to finance improvements;
?the disruptions to our business from construction and/or renovations;
?the possibility of construction delays, work stoppage, and material shortage;
?competition for development sites and tenants;
?environmental remediation issues;
?the extent to which our cinemas can continue to serve as an anchor tenant that will, in turn, be influenced by the same factors as will influence generally the results of our cinema operations;
?the increased depreciation and amortization expense as construction projects transition to leased real property;
?the ability to negotiate and execute joint venture opportunities and relationships;
?the risk of damage and/or disruption of real estate businesses from earthquakes as certain of our operations are in geologically active areas;
?the disruptions or reductions in the utilization of entertainment, shopping and hospitality venues, as well as in our operations, due to pandemics, epidemics, widespread health emergencies, or outbreaks of infectious diseases such as the coronavirus, or to changing consumer tastes and habits; and
?the impact of protests, demonstrations, and civil unrest on government policy, consumer willingness to visit shopping centers, and the spread of COVID-19, among other things.
?with respect to our operations generally as an international company involved in both the development and operation of cinemas and the development and operation of real estate and previously engaged for many years in the railroad business inthe United States :
?our ability to renew, extend, renegotiate or replace our loans that mature in 2020;
?our ability to grow our Company and provide value to our stockholders;
?our ongoing access to borrowed funds and capital and the interest that must be paid on that debt and the returns that must be paid on such capital, and our ability to borrow funds to help cover the cessation of cash flows we are experiencing during the COVID-19 pandemic;
?our ability to reallocate funds among jurisdictions to meet short-term liquidity needs;
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?expenses, management and Board distraction, and other effects of the litigation
efforts mounted by James Cotter , Jr. against the Company, including his efforts
to cause a sale of voting control of the Company;
?the relative values of the currency used in the countries in which we operate;
?the impact that any discontinuance, modification or other reform of London Inter-Bank Offered Rate (LIBOR), or the establishment of alternative reference rates, may have on our LIBOR-based debt instruments;
?changes in government regulation, including by way of example, the costs resulting from the implementation of the requirements of Sarbanes-Oxley;
?our labor relations and costs of labor (including future government requirements with respect to minimum wages, shift scheduling, the use of consultants, pension liabilities, disability insurance and health coverage, and vacations and leave);
?our exposure from time to time to legal claims and to uninsurable risks, such as those related to our historic railroad operations, including potential environmental claims and health-related claims relating to alleged exposure to asbestos or other substances now or in the future recognized as being possible causes of cancer or other health related problems, and class actions and private attorney general wage and hour and/or safe work place based claims;
?our exposure to cybersecurity risks, including misappropriation of customer information or other breaches of information security;
?the impact of major outbreaks of contagious diseases, such as COVID-19;
?the availability of employees and/or their ability or willingness to conduct work under any revised work environment protocols;
?the increased risks related to employee matters, including increased employment
litigation and claims relating to terminations or furloughs caused by theater
and entertainment-themed centers ("ETC") closures;
?our ability to generate significant cash flow from operations if our theaters
and/or ETCs continue to experience demand at levels significantly lower than
historical levels, which could lead to a substantial increase in indebtedness
and negatively impact our ability to comply with the financial covenants, if
applicable, in our debt agreements;
?our ability to comply with credit facility covenants and our ability to obtain necessary covenant waivers and necessary credit facility amendments;
?changes in future effective tax rates and the results of currently ongoing and future potential audits by taxing authorities having jurisdiction over our various companies; and
?changes in applicable accounting policies and practices.
The above list is not necessarily exhaustive, as business is by definition unpredictable and risky, and subject to influence by numerous factors outside of our control, such as changes in government regulation or policy, competition, interest rates, supply, technological innovation, changes in consumer taste and fancy, weather, earthquakes, pandemics, such as COVID-19, and the extent to which consumers in our markets have the economic wherewithal to spend money on beyond-the-home entertainment. Refer to Item 1A - Risk Factors - of our Annual Report on Form 10-K for the year endedDecember 31, 2019 , as well as the risk factors set forth in any other filings made under the Securities Act of 1934, as amended, including any of our Quarterly Reports on Form 10-Q, for more information. Given the variety and unpredictability of the factors that will ultimately influence our businesses and our results of operation, no guarantees can be given that any of our forward-looking statements will ultimately prove to be correct. Actual results will undoubtedly vary and there is no guarantee as to how our securities will perform either when considered in isolation or when compared to other securities or investment opportunities.
Finally, we undertake no obligation to publicly update or to revise any of our forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable law. Accordingly, you should always note the date to which our forward-looking statements speak.
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