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.]