Andrew Shapiro, President of Lawndale Capital Management, has provided an 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 Opportunity
As previously reported in mid-May, movie exhibitor and real estate developer Reading International (NASDAQ: RDI) announced what should be a major near-term catalyst for unlocking substantial embedded value in one of its most highly appreciated real estate development projects, Burwood Square, located in Melbourne, Australia. A unique major liquidity opportunity for buyers is being presented over the next week as substantial RDI shares (approx 1.3 million) are to be sold by Russell index funds. Such funds are completely indifferent to Reading’s value-unlocking activity, but are forced to sell at the end of this week when RDI is deleted from the Russell 2000 index, because it missed this year’s market capitalization cut-off.
Burwood Sale is a Catalyst
A May 16, 2010 article on SeekingAlpha.com, discusses the property and provides URL links to the parcel’s up-zoning and present development plans. A follow-up SeekingAlpha article on May 27, 2010 makes the argument that Burwood’s sale would convert difficult-to-value real estate and sizable hidden unrealized appreciation into easily valued cash, and that if Reading’s real estate value were removed from Reading’s present enterprise valuation, investors get a large geographically diverse movie exhibition business for “free”. (Note, alternatively, monetizing the movie theater business would create long-held and highly appreciated real estate for “free” as well.) That article concludes that, as Reading monetizes Burwood, investors ought to more easily price, via a higher stock price, the intrinsic value of both of Reading’s cinema and real estate segments.
Catalyst realization is in the Near term
A detailed Information Memorandum (a sales “teaser”) on the Burwood Square parcel posted on Reading’s website not only includes some some compelling photos and information illustrating the parcel’s substantial value, but it also sets a near term timeline for the sales process. Submissions of expression of interest and buyer qualifications are due next week on June 28th. Selection of short-listed candidates to participate in the next round of bidding will take place July 5th.RDI being deleted from Russell 2000 Index on Friday June, 25
On Friday, June 25th, the Russell indices will be recomposed for the coming June 2010-June 2011 year with new members added and some old members deleted. The composition of the Russell 2000 index (a subset of the Russell 3000E) is purely based on market capitalization size on Russell’s cut-off date (May 28, 2010), not any fundamental business assessment of value or prospects. Reading’s closing market capitalization on May 28 placed the company about 40-60 slots below the 3000th ranking company, and thus, Reading has been listed by Russell as one of over 200 companies being deleted from the Russell 2000 index. Note, RDI will remain in the less followed Russell Micro Cap index.
Index fund selling presents unique liquidity opportunity for RDI buyers
It is important to note that RDI’s upcoming deletion from the Russell 2000 index was not qualitative based and index funds can’t consider whether Reading is monetizing its Burwood Square parcel or not. They MUST sell their shares on or around the Friday June 25, 2010 recomposition date. RDI’s average daily trading volume is about 50K shares, a modest and respectable number for a company that lacks any sell-side analyst coverage whatsoever. However, this amount is dwarfed by the estimated 1.3 million or more RDI shares held by index funds connected to the Russell 2000 index that must be sold.Given the substantial surge over the last several months in RDI shares held short to approximately 780K shares on May 28, I feel some RDI shares to be sold by index funds are already spoken for. However, a substantial block of RDI stock liquidity remaining to be sold by index funds will enter the market in the coming week and, once sold, won’t be available to interested buyers under similar circumstances again. The next index participation in RDI likely won’t be till next year, after Burwood and possibly other real estate parcels are monetized or built out. That scenario would be index funds buying RDI shares, when the company likely gets added back into the Russell 2000 index.
Disclosure: At time of writing, funds author manages hold a long position in RDI. The funds may buy or sell shares at anytime.
[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.]
Greenbackd 
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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Greenbacked,
I had a look at the old 10-Ks to get a feel for how much upside there might be on the Burwood parcel of land – I’ve cut and pasted parts of my comment to Andrew on the seekingalpha article.
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From page 30, of the 2004 10-K.
“Our original cost basis in the site is approximately $4,173,000 (AUD$5,250,000). The property was originally acquired in 1996, but was revalued upward in connection with the Consolidation in 2001, which was treated as a purchase for accounting purposes. This revaluation was made prior to the designation of the site as a “major activity center” in 2004. The property is currently on our books for $16.6 million (AUS$21.5 million).”
Given that the original cost basis (post-consolidation) was $4.1m and it’s now on the books at $47m, I would respectfully suggest that most of the value is reflected in the books, and isn’t that hidden. Factor in the sharp drop in the $A since the start of the year and weakening outlook for commodity currencies, and they might even have to settle for less than book (pure speculation on my part).
How much hidden value upside do you really think there is from $47m?
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While the sale will realise value I don’t think there’s that much more upside from $47m.
cheers
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Albert,
Sorry to take so long to reply back on your comment. Since this article had more time sensitivity to it tied to the RU 2000 recomposition, your comment slipped through the cracks. First a few corrections to your comments. You correctly quoted the 2004 10-K but start your comments with faulty suppositions.
The original cost basis referred to was RDI’s cost in 1996. Configuration of the 50+ acres consists of an assemblage of 3 separate contiguous parcels that were acquired for an aggregate AUD$9.5MM. Then it was way back in 2001 when book values on most RDI parcels were revalued up as part of the appraisals tied into three- company taxable merger [of Craig Corp (CRG), Reading Entertainment (RDGE) and Citadel Holdings (CDL)] that formed Reading International (RDI). Since this was a taxable merger, there was cash and tax motivation to UNDERVALUE the appraisals of the respective write-ups of RDI’s assets.
So first – The post consolidation cost basis was higher than the $4.1MM you cite. A summary of those undervalued appraisal ranges can be found in the S-4 amendment filing made by RDI on December 11, 2001 which I have linked here for everyone’s convenience. http://www.sec.gov/Archives/edgar/data/716634/000089843001503835/ds4a.txt
Second – The incremental rise in book value subsequent to 2001 include windows when Burwood was considered “under development” and both soft and hard costs plus capitalized interest expenses were incurred and added to Reading’s cost basis as Reading first up-zoned (move to “Major Activity Center” status in 2004), then improved (filling in most of the rock quarry) and then environmentally remediating the soil on the site for several million $. These costs are what has raised Reading’s accounting value in the property but are tied to real value that has been added and not any capitalizing of outside appreciation that has taken place in the surrounding area over the course of 15 years. That appreciation is the result 3 things – A) the passage of time/INFLATION over so many years; B) UP-ZONING of this parcel from purely industrial brickworks to full blown mixed-use residential, commercial (including office towers), retail and entertainment zoning, and C) OUTMIGRATION OF POPULATION, which is quite evident in the photographs I have in many articles provided links to. RDI’s putting the parcel up for sale further supports the appreciation is even more sizable now when a majority of the parcel is only residential rather than the mixed use RDI was taking on themselves.
Finally, not only has the AUD$ recouped the drop you cited in the short run for the year, many would question your supposition of a weakened outlook for commodity currencies vs. the US government’s overly leveraged situation.
Furthermore, the main import of the monetization and sale of Burwood is not the accounting gain RDI will very likely experience on the parcel’s sale. It is the fact that this parcel is not encumbered by ANY debt and is not generating a dime of cash flow for RDI (arguably its costing RDI some EBITDA) and is being monetized. In my opinion, given RDI’s $35MM EBITDA from operating assets and its substantial other developable parcels that have also appreciated and which don’t presently generate any cash flow, the value of Burwood is not in RDI’s stock price. So monetization value of Burwood should provide a substantial transfer of RDI’s enterprise value from the pile of chips called debt to the pile of chips called market value.
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over 2.5 Million shares traded on Friday. Expect another day of above average volume (but not nearly as high) in early morning trading on Monday and then almost all funds that must track the Russell 2000 will be out until next year’s recomposition. RDI remains in the much smaller Russell Micro Cap index.
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