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.]
While I haven’t had a chance to write a new Seeking Alpha article yet on Reading’s Q3 2011 and updated real estate monetization, here is an article that should catch everyone up through June quarter, including revised real estate monetizations plans.
Reading International: Strong Q2 Bests Public Peers; Real Estate Remains Undervalued
http://seekingalpha.com/article/287867-reading-international-strong-q2-bests-public-peers-real-estate-remains-undervalued
These new plans added some major new york city parcels, (cinema 123 and Union Square) to his list of parcels to move into monetization and development mode, while also reconfiguring (explains delay) the sale of 50+ acres of Burwood Sq (Melbourne Aus) into 3 pieces. The largest piece (31-34 acres residential only) is present focus of sale discussions, followed by smaller (6 acres commercial/residential piece) for sale and a middle sized (11-13 acres Retail/entertainment) parcel that Reading will develop itself.
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A new Reading 8-plex opened yesterday in Australia.
In addition to digital projection in all screening rooms, Reading’s new multiplex in Newcastle features the company’s 2nd jumbo-sized Titan XC theater, (this has been a huge success in Hawaii), and two of Reading’s Gold Lounge cinemas with big recliners, tables and alcohol beverage service and reserved seating, features that come at premium price that Aussies have come to really like.
See “Bums on posh seats at new Charlestown cinema”
JAMES JOYCE 19 Oct, 2010 04:00 AM
for full story at http://www.theherald.com.au/news/local/news/general/bums-on-posh-seats-at-new-charlestown-cinema/1972933.aspx?storypage=0
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Late last week, Reading filed an 8-K disclosing an important claim to forgive part of Reading’s debt. My review of past publicly filed exhibits found the note agreement and some unique terms that support my calculations that substantial accrued interest will also be forgiven, thus eliminating almost the entire amount of this note. This provides a sizable increase in Reading’s tangible book value plus an ongoing improvement in Reading’s income in Q4 and going forward from reduced debt.
I mentioned the possibility of this event very briefly in a recent Seeking Alpha “Just One Stock” interview as a potential catalyst and it is now coming to fruition.
The editors of SeekingAlpha.com have today chosen to publish a new article I wrote on this debt forgiveness and my calculations.
Substantial Debt Forgiveness at Reading International Should Boost Q4 Results
http://seekingalpha.com/article/229284-substantial-debt-forgiveness-at-reading-international-should-boost-q4-results
I hope you find the article helpful and informative. If you like the article be sure to recommend it, tweet it and give it a thumbs up rating, etc.
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Reading Int’l (RDI) featured in “Just One Stock” interview today on cover pg of Seeking Alpha.
http://seekingalpha.com/article/227729-just-one-stock-come-for-the-real-estate-stick-around-for-popcorn-and-flicks?
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[…] update on Reading International Inc (NASDAQ:RDI) (see the RDI post archive here. Andrew has also responded to commenters in the first post.): Reading International: Index Fund Selling Presents Unique Liquidity […]
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[…] Read more: this website […]
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Company has $227m of debt, plus another potential c.$60m of tax liabilities under dispute. This puts EV ($350m including tax liability) much closer to stated book value of assets of $375m. any concern about debt profile and whether this is going to result in some forced sales of those assets?
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“When a reserve is tagged in the balance sheet as for ‘possible additional tax’ the analyst would do well to include it among Current Liabilities, even though the company places it elsewhere … ”
– Graham & Dodd, 3rd ed, pp183-4.
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The company’s present view of this long standing litigation so far agreed to by their auditors is as well is that no reserve anywhere near this size is tagged on the balance sheet. that is because the IRS long ago offered to settle the claim for a fraction of the poster’s tax liability amount. The case will finally go in front of a tax court judge in July, if it doesn’t settle before then.
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Just to follow up on Andrew’s comment.
I believe that the offered settlement amount was for $5 million or so. Also, the subsidiary entities against which the tax liabilities are levied are stated to principally own only RDI securities, so it wouldn’t seem to materially affect the operation of either of the company’s divisions.
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Pitch this stock to Bill Ackman at Pershing Square — maybe he’ll be able to get the company to spin off its real estate assets to unlock some value … like he tried to do with Target last year …………………..
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The two businesses haven’t been large enough together to garner analyst coverage and RDI’s market cap fell shy about 40 company’s from even staying in the RU 2000. Splitting them off as two separate public entities would only worsen these issues. am an activist and got these guys to merge 3 much smaller micro-cap predecessors, Craig Corp, Reading Entertainment and Citadel holdings to merge to become this larger less conflicted and complicated small cap co- Reading International.
Forced sale of the parts to private entities, would not only blow sizable NOL but be difficult to achieve. Family that controls it has little over 25% economic ownership but >60% of voting control via dual class shares.
It should be noted controlling family hasn’t been operating the company poorly. They have been growing EBITDA and migrating the company from asset play to operating play and growing EBITDA. Issue was they got stuck with too much undeveloped land at a time when it and development capital became scarce and slowed down the build out of these parcels for either cash flow generation or sale as completed parcels. For example, the old sutton hill cinema in nyc that was on 57th st on east side. It is now PLACE 57 luxury condo tower and been completely sold to others. RDI’s development parcel in indooroopilly brisbane AU was completed last year and has now been fully leased to the brisbane city council and is generating cash flow.
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Click to access cms_4b56688d0b276.pdf
I found an index of RE prices in this report. If you look at the various charts, you can get a picture of RE prices in 5 Australian cities + 1 Tasmanian city and the mean is an index of about 300. The best part about it is the index = 100 at Dec. 1996 which I believe is the year the Melbourne property was acquired. A few caveats: this index doesn’t include Melbourne, but 5-6 other major cities (that’s why I took an average of ~300). Secondly, I have absolutely no idea about this source and whether or not it is legit (just a simple google search). Thirdly, this is real estate property price index and not land prices. Obviously, this is quite crude but interesting intel nonetheless. Not sure the property is worth $200m but obviously, this would definitely be bullish on a valuation north of $100m!
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especially when this burwood parcel is completely unencumbered. This would mean all net proceeds from sale drop the EV without reducing EBITDA (arguably this parcel costs the company something). Hold the multiple constant (though one might argue one ought increase the multiple for less leverage risk and you get a sizable transfer of value into the market cap portion of EV.
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Be advised: There is a mania for real estate down under. It’s not quite at tulip-bulb levels yet, but prices have been rising rapidly for a number of years (in excess of general economic growth) and the market was scarcely affected the US sub-prime bust. Surveys published in the Economist magazine over the last few years indicate that the Aussie real estate market generally is one of the most overvalued in the world. The market has been propped up recently by governmental stimulus (especially at the retail level), but it has been driven for years by some bigger institutional factors (eg, more and more pension fund money chasing fewer and fewer opportunities).
Remember, be fearful when others are greedy …
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Nemo, – What you cite is exactly why RDI is putting up this ‘crown jewel’ on the block. They said at the annual meeting that It is the residential sector is the strongest of this mighty RE wind as well. Reading’s plans for 700-1000 units and a bunch of comm’l, retail and entertainment (multiplex, etc.) is no longer optimal but 2000 residential units looks more likely. Residential is not Reading’s strength. So they are marketing the whole piece and may seek an option to participate back on the smaller portion that is their expertise. They do want multiplex here.
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Reading’s Burwood Square parcel, which is being marketed for sale, is one of the last prime developable parcels in all of Melbourne.
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http://theage.domain.com.au/real-estate-news/melbourne-to-top-sydney-as-least-affordable-city-20100818-12f4s.html?from=watoday_ft
Melbourne to top Sydney as least affordable city
Simon Johanson
August 19, 2010 – 3:00AM
MELBOURNE could overtake Sydney as the least affordable Australian city to buy a home in if trends showing housing affordability plummeting to near-record lows continue.
A combination of interest rate rises and property price growth has seen housing affordability worsen more in Melbourne than other capital cities over the past year.
The deteriorating situation for first home buyers and young Australians was revealed in the latest Housing Industry Association affordability survey for the June quarter.
The HIA-CBA Housing Affordability Index fell 9.1 per cent over the last three months to be 32 per cent lower compared to the same period last year, showing a worsening situation nationally.
Affordability in regional Victoria fell by 9 per cent. In Melbourne, it dropped by 6.7 per cent, down 39.8 per cent on a year ago.
The index combines interest rates, household incomes, home prices and other factors, such as the removal of the first home buyers’ impetus to determine housing affordability.
It doesn’t give a suburb-by-suburb breakdown of the most or least affordable places in capital cities or regions.
According to property analysts RP Data, the most expensive electorate to buy a home is Wentworth in NSW. It includes Sydney’s wealthiest suburbs: Point Piper, Bellevue Hill, Vaucluse, Double Bay and Dover Heights.
On a more simple measure of affordability, the median house price of the marginal Liberal seat held by Malcolm Turnbull – which needs a swing of 3.9 per cent to change hands – is a staggering $1.65 million.
By contrast, Julia Gillard’s safe Labor seat of Lalor – held by a margin of 15.5 per cent – has a median house price of $300,000 and is the most affordable metropolitan electorate in Australia, RP Data analyst Tim Lawless said.
It includes the suburbs of Laverton, Point Cook, Werribee, Rockbank and Melton.
Neither main political party has released significant policies addressing home affordability or high house prices, despite the federal election being two days away.
“There has been a dire lack of commitment in this federal election campaign to address the substantial hurdles aspiring home owners face,” said HIA chief economist Harley Dale.
In Melbourne, affordability dropped year on year by 39.8 per cent. Affordability in Sydney, by contrast, dropped 33.5 per cent. ”If that trend were to persist then you would rapidly be approaching a situation where Melbourne is on a par with Sydney in terms of [least] affordability,” Mr Dale said.
Housing affordability reached a record low in March 2008 when bank interest rates were above 9 per cent. The latest score on the affordability index in Melbourne is one point above the low of 2008.
The largest falls for the June quarter were recorded in Sydney (-9.1 per cent), Regional Victoria (-9.0 per cent), Regional Tasmania (-8.8 per cent) and Adelaide (-8.7 per cent).
This story was found at: http://www.theage.com.au/domain/real-estate-news/melbourne-to-top-sydney-as-least-affordable-city-20100818-12f4s.html
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Great writeup. Any insight on Mark Cuban’s involvement? I see the following writeup after his purchase:
http://www.streetinsider.com/Insider+Trades/Mark+Cubans+Investment+In+Movie+Chain+Reading+International+%28RDI%29+Should+Have+A+Happy+Ending/4756331.html
More than anything I’m wondering if you came across anything else to indicate that he might serve as a catalyst. Obviously he’s not an activist, but you can see aggressiveness courtside…
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Cory,
Mark owns several entertainment businesses highly synergistic with RDI (Landmark theaters, magnolia pictures, etc.) and he has been quoted with a fondness for investment in Australia as well.
I don’t know of his intent for activism here but I do know his presence GREATLY reduces the typical risk that always exists from dual class securities. He has a larger economic investment in the bigger float more liquid non-voting RDI shares than the voting RDIB shares.
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I always wonder how on earth people find companies/situations like this. There is no way to screen for something like this. Awesome though, I bet they get a huge portion of the market cap in cash on that sale. very interesting….
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Shaun,
I initially found RDI’s predecessor companies when Reading Entertainment (RDGE) traded at huge discount to book and a discount to cash. First investment was in RDGE’s parent – Craig Corp (CRG) [the old car stereo co out of bankruptcy] as CRG was trading a big discount to RDGE’s market value let alone CRG’s book value. So instead of paying 50 cents on the dollar, I originally purchased at 25 cents on the dollar. So despite RDI’s cheapness right now, my cost was far lower. Though before the 2008 plummet of RDI stock price my IRR was a whole lot higher.
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