Posts Tagged ‘Andrew Shapiro’

Andrew Shapiro has talked to Seeking Alpha’s Jason Aycock about his single highest-conviction position, Reading International (RDI) (See the RDI post archive):

If you could only hold one stock position in your portfolio (long or short), what would it be?

Our best risk/reward idea is Reading International (RDI), an internationally diversified movie exhibitor, with a related business segment that owns, develops and operates substantial real estate assets, many of which are entertainment-themed retail centers (“ETRCs”) anchored by Reading’s cinema multiplexes. Reading’s cinemas generate growing, recession-resilient and recurring box office and concession cash flows. The cinema business builds value by paying down acquisition debt, as well as funding the front-end cash demands of developing Reading’s valuable real estate assets. The development process includes purchasing raw land, up-zoning, development and construction, eventually generating cash through leasing or outright sale.

In addition to its upside from present prices triggered by impending catalysts and growing cash flow, Reading has an enormous “margin of safety” both from the value of its huge landholdings in Australia, New Zealand and the United States, as well as a reasonable valuation of its cinema segment.

Tell us a little more about the company behind the stock.

Over the past few years, Reading has strategically expanded its many cinema circuits in Australia, New Zealand and the U.S. through organic growth and acquisitions, building the fourth-largest exhibitor in Australia, third-largest in New Zealand and the 12th-largest here in the United States. Its approximately 462 screens in 56 cinemas and four live (“Off-Broadway”) theaters are primarily situated on owned or long-term leased land.

Reading’s cinema segment cash flows have continued to show resiliency in recessionary times, producing approximately $35 million of adjusted EBITDA for the 12 months ended June 30. In addition to selective new theater openings and culling of underperforming theaters, Reading has begun equipping a majority of its theaters with digital 3-D capabilities that will provide incremental cash flow into this cinema segment.

As for the real estate segment: Unlike other cinema exhibitors, Reading owns over 16.5 million square feet of real estate, of which only 1.2 million square feet is already developed and generating approximately $13.5 million of adjusted EBITDA for the 12 months ended June 30. In many instances, Reading benefits by having its own multiplex as an anchor tenant and by having itself as landlord. Developed real estate includes the Courtenay Central shopping center in downtown Wellington, New Zealand; the Red Yard Centre in the Auburn suburb of Sydney; and the Reading Newmarket Centre near Brisbane, Australia.

A substantial portion of the more than 15.3 million square feet of additional land owned by Reading holds great cash flow growth potential as it is developable in desirable urbanized locations throughout Australia, New Zealand and the United States, but not yet generating a dime of cash flow. These undeveloped parcels are in various stages as stand-alone developments or “phase two” expansions of existing ETRCs. In addition, Reading owns the land underneath its New York City and Chicago live theaters, including the Union Square Theater, and also midtown Manhattan real estate underneath its Cinema 123 on Third Avenue, across from Bloomingdales – all prime land.

Reading’s 51-acre Burwood Square project in Melbourne, Australia, is by far Reading’s most valuable undeveloped parcel, on its balance sheet for around $45 million. Purchased in 1996 when it was a former brickworks and rock quarry, this giant parcel has now been upzoned to be a “major activity center,” zoned for residential, commercial, entertainment and retail use, and is one of the last prime developable sites fairly close to Melbourne’s central business district.

It should be noted that Reading owns its Burwood parcel (as well as its recently completed and leased Indooroopilly Brisbane office building) debt-free, unencumbered by any mortgages.

Most of Reading’s real estate that has been held or developed over a long period of time (some, like Burwood, since the mid-90s) is on the company’s balance sheet at values which we believe greatly understate current market value. These parcels have enjoyed – to varied degrees – substantial unrealized appreciation from up-zoning, surrounding population growth, property improvements, construction and lease-out, and, in some instances, more than a decade of market inflation.

As more of Reading’s real estate assets are converted to either current cash flow generation or outright sale, Reading ought to be viewed more and more as an undervalued growing operating company attracting a multiple, rather than simply an asset play.

How does your choice reflect your firm’s investment approach?

My firm, Lawndale Capital Management, and the funds it manages have for over 17 years targeted capital appreciation in securities where our research-intensive and active style can add value by identifying and capitalizing on market mispricing. We invest as very active owners, preferring to have strong friendly relationships with the portfolio company managements and boards, but never afraid to take any and all measures that are in the best interests of protecting and creating value, including proxy fights or other legal steps. We regularly take 13D filing-size positions and communicate our views.

We seek large returns through concentration in a few core companies that are analytically out-of-favor (contrarian), analytically complex (special situation), or analytically uneconomic (illiquid). We find small and micro-cap company stocks, and small issues of more senior securities such as preferred stock, and corporate debt of even larger companies, are often priced inefficiently due to illiquidity and investor neglect or incomplete fundamental analysis.

We balance our quest for substantial returns with a fundamental tangible asset-based and deep value-style approach, seeking a “margin of safety” that cushions the biggest risk to our returns: the extensive time and effort to unlock value in our portfolio companies.

Our Reading investment fits right in with our strategy. It started even more analytically illiquid and complex when initially invested in Reading’s three micro-cap predecessor companies, Craig Corp., Reading Entertainment and Citadel Holdings. These companies had much smaller public stock floats and an interrelated ownership structure confusing to most investors. We encouraged and supported a year-end 2001 merger of the three companies to become the single, simpler and larger small-cap Reading International. Even today, tracking progress milestones and estimating the value of Reading’s multiple undeveloped foreign parcels turns off most investors and every sell-side analyst. The fact that Reading’s current stock price basically provides its sizable undeveloped landholdings for free more than adequately provides us our required margin of safety.

How much is your selection based on the Reading’s industry, as opposed to a pure bottom-up pick?

The concentrated private-equity-like portfolio approach Lawndale takes creates inherently larger event risk, so we seek to invest as generalists in several different industries. That being said, as deep value balance sheet-focused investors, we have a predilection for companies with hard assets where investors aren’t pricing those hard assets. For example, with Reading, we own a sizable cinema player that owns a lot more land than investors give it credit for.

In general, our selections are bottom-up where we identify assets undervalued by the market due to perceptions or misperceptions of perpetual deterioration or perpetual stagnation at best. We look for operations that can be turned around, credit quality that can be improved, or dysfunctional boardroom and management situations that are fixable with a catalyst such as ourselves.

How is Reading positioned with regard to competitors?

Initially, the entrenched real estate moguls in Australia severely stalled Reading’s development plans in the late ’90s and early part of this decade, but that logjam has been overcome and almost all of Reading’s parcels have now received their up-zoning.

While Reading’s small theater footprint in the U.S., relative to Regal (RGC) and Cinemark (CNK), had hurt availability and terms on first-run films several years ago, an antitrust lawsuit against the largest movie studios and exhibitors (long since favorably settled) and growth of Reading’s market share in certain markets (70% Hawaii, 12% San Diego) has alleviated this issue.

How does Reading’s valuation compare to its competitors?

Extracting the value of all of Reading’s real estate from its enterprise value imputes a compelling, very low or even negative multiple on Reading’s geographically diverse cinema business. Alternatively, Reading’s cinema business, using multiples below those of comparables, plus its understated book value on its developed real estate, exceeds Reading’s present enterprise value. Thus, the value of all of Reading’s substantial to-be-developed real estate is “free,” serving as a substantial “margin of safety.”

Without individual cash flow figures available on Reading’s land, our valuation model becomes a three-pronged matrix. On the cinema segment, we use an EBITDA multiple as well as a multiple on-screen count. For developed parcels, we are compelled to use a multiple on net book value, based on building age and occupancy and/or appraisals the company previously disclosed. On the to-be-developed parcels we use very conservative assumptions in an NPV approach. Finally, while cinema segment G&A is accounted for in its EBITDA, including a deduction for the value of real estate segment and normalized corporate G&A expenses results in a total value range for RDI of at least $8-12/share. [Reading closed Wednesday at $4.32.]

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Andrew Shapiro, President of Lawndale Capital Management, has provided a further update on Reading International Inc (NASDAQ:RDI) (see the RDI post archive here):

In Reading’s 2008 Consolidated Entertainment/Pacific Theaters acquisition of 181 movie screens in California and Hawaii, there were three contingent purchase price reduction tests, each forgiving a portion of the acquisition’s seller note PLUS interest RETROACTIVE back to the Feb 2008 acquisition date. Two of those tests have already taken place and have reduced the seller note (“US Nationwide Loan 1” on Reading’s 3/31/10 schedule of Notes Payable) to $15.3 million.

This article notes the first anniversary of a competitive theater in Bakersfield California, within the competitive radius of Reading’s Valley Plaza 16, triggering the last contingent purchase price reduction test.

A multiple of the cash flow reduction experienced by Reading’s theater over this PAST year (that is lower EBITDA which RDI shareholders have already “suffered” from) is to be returned to Reading in the form of forgiveness on the seller note. The measurement will take place this current quarter.  Reading’s lowered debt from forgiveness of a portion or all of the US Nationwide Loan 1 and recovery of accrued interest expense on the forgiven principal RETROACTIVE to the Feb 2008 acquisition date is likely to occur during Q4, after Pacific Theater’s audit of Reading’s claim.

RDI has also announced that it has settled its tax dispute with the IRS. Here’s the release:

Reading International Settles Tax Case with IRS

Los Angeles, California, – (BUSINESS WIRE) – July 16, 2010 – Reading International, Inc. (Reading) (NASDAQ:RDI) announced today that its wholly owned subsidiary, Craig Corporation (Craig), has reached an agreement in principle to settle its tax dispute with the Internal Revenue Service (IRS) related to Craig’s tax year ended June 30, 1997. Craig and the IRS are currently in the process of documenting this settlement. The settlement resulted in a 70% concession by the government and will lead to the previously issued IRS Notice of Deficiency, dated June 29, 2006, in the amount of $20.9 million, $47.2 million inclusive of interest, being set aside by agreement of the parties. Reading estimates that, as of the date of this release, Craig’s liability under this settlement is approximately $15.0 million inclusive of interest, although final calculations have yet to be agreed. As of March 31, 2010, Craig had reserved $4.5 million against this liability.

The impact of this settlement with the IRS on Reading is approximately $14.0 million, resulting in a charge against earnings of $9.5 million for the second quarter.

[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.]

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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.]

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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.]

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