Andrew Shapiro, President of Lawndale Capital Management, has provided today’s guest post on Reading International Inc (NASDAQ:RDI):
Exhibitor Reading Int’l – Cashing in on Aussie Land Boom – getting the movies for free.
Movie box office isn’t the only business that’s popping for theater exhibitor Reading International (NASDAQ: RDI) these days. In fact, a resurging property boom in Australia, particularly in Melbourne, is likely to have a greater effect on Reading’s near term market value than Avatar, Alice, Shrek or anything else on the silver screen.
That’s because Reading isn’t just a 466-screen exhibitor that has the 3rd, 4th, and 12th largest share in Australia, New Zealand, and the US, respectively. Reading also owns valuable real estate parcels that have appreciated, in some instances, for over more than a decade, from surrounding population growth, substantial up-zoning, construction, lease-up and, of course, inflation.
It important to note that, at $4/share, the entire company’s market cap is $91MM. Book value, at almost $5/share, is understated for all the appreciation on Reading’s real estate. Extracting the value of Reading’s real estate from its enterprise value imputes a very low—possibly even negative—multiple on Reading’s cinema business. In essence, you buy the land and get the movie business “for free”.
At its recent annual meeting, Reading made a slide presentation filed as an 8-K with the SEC. This presentation besides highlighted 2009’s record growth and an outstanding Q1 2010, illustrated, among other things, how Reading’s EV/EBITDA valuations were already equal to or somewhat less than comparable companies in both industry segments (see pages 7 and 9).
Per Reading’s 2009 10-K, its Real Estate segment is 49% or $197.MM of the company’s assets. These assets include fee ownership of approximately 16.5mm sq. ft. of real estate comprised of 1.2 million sq ft. of cash flow generating commercial real estate, and approximately 15.3 million sq. ft. of land to be developed and built upon in the future. So almost 93% (15.3 sq. ft./16.5 sq ft) of Reading’s real estate assets presently do not yet contribute to Reading’s present $36MM adj EBITDA (LTM March 31, 2010).
The substantial amount of assets carried in Reading’s enterprise value that don’t contribute EBITDA is why the Reading’s recent decision to list for sale its large and unencumbered 51-acre Burwood Square development parcel in Melbourne is a major near-term catalyst that should shed light on Reading’s deep stock market undervaluation.
Purchased by Reading in 1996, the Burwood land has enjoyed almost 15 years’ worth of appreciation due to inflation, surrounding population growth, and substantial up-zoning. Burwood is on Reading’s balance sheet for only $47MM, and represents the largest unrealized gain of any of Reading’s eight major undeveloped parcels, which together comprise 130 acres, have a gross book value of $70MM and don’t presently contribute to EBITDA.
Acquired when it was nothing more than a rock quarry and zoned industrial, Burwood Square is now one of the last prime developable sites fairly close to Melbourne’s central business district. Indeed, the parcel was, until recently, part of a mixed-use development plan that was to include commercial, retail, and entertainment space, and 700-1000 residences.
However, there now appears to be good reason for the parcel to have an increased residential component – perhaps more than 2000 residences. According to an article in a leading Melbourne paper, Burwood-area homeowners are seeing enormous growth from the steady rise in demand caused by housing requirements of nearby Deakin University and an influx of Chinese residents/students. It should be noted that student housing demand is less cyclical than most.
A detailed Information Memorandum (.pdf) (a sales “teaser”) on the Burwood parcel has recently been posted on Reading’s website. The teaser includes some amazing aerial photos clearly showing how Melbourne’s burgeoning population has migrated over the years to completely surround this crown jewel of Reading’s real estate holdings. In addition, the memo sets forth that indications of interest, including buyer’s offer price, conditions and credentials and plans, are to be provided by end of day, June 28 and that Reading will short list its candidates by July 5th.
The sale of Burwood would convert a parcel, which comprises almost ¼ of Reading’s real estate asset book value, and unlock substantial embedded unrealized gain, into cash. Investors ought to more easily reflect the intrinsic value of both of Reading’s business segments after monetizing Burwood and selling or developing other Reading non-EBITDA-generating parcels with a higher stock price.
Andrew also provided a link to the detailed Information Memorandum on the Burwood parcel (.pdf), which includes photos “making it clear how valuable this parcel is and what kind of embedded gain it represents.” Here is a sample photo:
[Full Disclosure: I hold RDI. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]